The Retail Market Research – Q3 – 2011
November 11, 2011
October 27th 2011
Highlights
The U.S. Economy
National Retail Market
Orlando Retail Market
THE U.S. ECONOMY
It’s up. It’s down. And if there were only a few reasons to account for so much volatility in the financial markets, they wouldn’t be quite as scary. But they are, and this instability, combined with other factors, is continuing to make commercial real estate an attractive investment alternative – particularly when combined with today’s low interest rates and stabilizing property values. In addition, the roller-coaster market rides in August and September may lead to even more capital flowing into commercial real estate, particularly multifamily and retail. Why? Compare fundamentals and returns and you have your answer.
Retail market research for the 2011 Third Quarter shows the U.S. economy is on much firmer ground as measured by retail sales, corporate profits and cash reserves, exports and manufacturing. All are at pre-recession levels.
Yet equity markets have been on a wild ride, in contrast with numerous improving fundamentals for commercial real estate, making it an attractive alternative for investors with a five-to-seven year horizon. Add to this a pool of domestic and foreign capital sources that view commercial real estate favorably.
Despite recent threats, prospects are bright for the long term future of the U.S. economy and the retail real estate industry. “We see a two out of three chance that the U.S. economy will continue to grow” said Mark Vitner, Managing Director at Wells Fargo Securities at the ICSC conference in New York last month. “For commercial real estate, low interest rates and slow growth are good.”
Job Growth. Europe’s debt issues and the political stalemate in the U.S. have not resulted in corporate panic or large-scale layoffs, but the job market remains stagnant. However, the potential for job growth is evident, and the economy is showing a respectable level of resilience.
Distressed Loans and Sales. The number of new distressed loans has slowed considerably in the past three months. Workout activity exceeded inflows again in August and September as most lenders continued to reduce outstanding distressed loans. Distressed sales pricing is down 60% from the peak.
Commercial Real Estate Sales Trend. Sales of significant commercial properties continue to rise but the rate of growth represents further slowing. Despite the recent loss of momentum, prices appear to be holding firm with cap rates stable across all property types.
Capital Markets. Up until June, credit availability improved dramatically and was the biggest contributing factor for more than doubling in transaction volume in the first half of 2011. However, between June and August, the availability of capital has tightened and costs have increased for all but the most pristine properties, mainly due to the fact that CMBS spreads have significantly widened which affects prices and availability of key source of debt for acquisitions. CMBS loans originations are likely to remain slow for several quarters. In September, loan origination began to improve again with national banks and life insurance companies that have quietly turned on the lending spigot with their fixed rate lending.
THE NATIONAL RETAIL MARKET
At last buyers and sellers are also moving closer in their definitions of fair value and improved prices are motivating more sellers to bring their inventory to the market. Overall cap rates averaged over 600 basis points above the 10 year treasury at the close of the third quarter this year. This spread provides long term investors with a buffer against limited NOI growth and encourages modest risk tolerance. Many investors will begin to pursue yields in B class properties in primary and well-performing secondary markets. Cheap money is fueling the Net Lease Market. So far this year over 15,000 single tenant retail properties valued at $15B have traded hands.
Dollar store retailers will expand further, as will automotive related retailers, and hybrid grocery stores including drug stores that are looking to add food components. Big and mid-box retailers will reduce footprints by 50% and enter new markets with smaller and more competitive stores such as the Wal-Mart Neighborhood Center.
The recent acquisition by Blackstone of the Equity One portfolio of 36 shopping centers is a good sign for retail properties. These people know real estate cycles very well and it seems that they believe that we are in the beginning of another growth spur; the time to buy is now. According to the latest Moody’s investors report, “Looking forward, we do not envision significant price increase over the next year”.
In fact, in my personal opinion, keeping in mind that interest rates are artificially kept low by the Fed until 2013, it’s only a matter of time until inflation pushes rates higher which will push cap rates higher.
Although construction is muted and not expected to improve soon, it will take several years until job growth and discretionary income increases enough (longer thanks to inflation) along with retailers expansion to significantly improve occupancy levels and start pushing rental rates higher.
THE ORLANDO RETAIL MARKET
The Orlando retail market experienced a slight improvement in the third quarter of 2011. Resurgent of national retailer’s expansion, renewal of job growth, a rise in households, 8% increase in retail spending, all represent a positive development in Orlando which will translate to lower vacancies in the next 12-18 months.
- Shopping Center market consists of 1,309 projects with 62,234,506 square feet of space. The vacancy rate declined to 11.6%. Rental rates average at $15.31/SF, down over the last quarter from $15.88/SF.
- Power Centers vacancy rate is at 7.7%, down from 8.3% last quarter. Rental rates are at $16.4/SF.
- Mall vacancy rate is at 4.9% with rental rates average is at $23/SF.
- General Retail vacancy is at 4.1%, rental rates average is at $14.31/SF.
- Absorption is stronger with 484,827 SF absorbed this quarter.
- Construction. 56,422 SF were completed this quarter, a total of 200,000 in 2011.
- Employment. 13,800 jobs are expected to be created in 2011, an increase of 1.4% from 2010.
- Multi-Tenant Retail. Sales volume of retail centers in 2011 was up compared to 2010. In the first 6 months 19 transactions closed with an average price of $96/SF.
- Cap Rates. Cap rate of all retail centers that sold is higher this year. The average is 9.7%. Best-in-class grocery-anchored shopping centers continue to see the mid-7% range.
- Outlook: Best in class properties will remain in high demand but the low supply is causing investors to start seeking B class properties in good locations. Confidence in retailers such as Winn-Dixie is growing.
- Single Tenant. Best in class credit tenants such as drug store are trading at mid 6% cap rate and up to 7.5%-8.5% for lower credit chains, restaurants, dollar stores etc’. Average price is $210/SF.
ORLANDO’S SUBMARKET HIGHLIGHTS
Altamonte/Douglas Inventory – 5,174,288 SF, Vacancy – 7.5%, Quoted Rate – $13.83.
Brevard County Inventory – 29,429,337 SF, Vacancy – 9.8%, Quoted Rate – $11.74.
Casselberry Inventory – 6,504,316 SF, Vacancy – 9.5%, Quoted Rate – $16.
Downtown Inventory – 5,231,539 SF, Vacancy – 3.5%, Quoted Rate – $25.8.
Kissimmee Inventory – 7,536,751 SF, Vacancy – 8.1%, Quoted Rate – $13.87.
Lake County Inventory – 15,328,714 SF, Vacancy – 7.2%, Quoted Rate – $15.96.
Lake Mary Inventory – 3,250,128 SF, Vacancy – 6.9%, Quoted Rate – $17.56.
Lee Road Inventory – 1,143,364 SF, Vacancy – 4.9%, Quoted Rate – $15.77.
Longwood Inventory – 1,855,723 SF, Vacancy – 10%, Quoted Rate – $12.91.
Maitland Inventory – 3,669,062 SF, Vacancy – 10%, Quoted Rate – $15.
Metro West Inventory – 2,065,253 SF, Vacancy – 8.5%, Quoted Rate – $15.34.
North Outlier Inventory – 1,422,918 SF, Vacancy – 18.1%, Quoted Rate – $17.37.
Orlando Airport Inventory – 857,712 SF, Vacancy – 10.5%, Quoted Rate – $21.77.
Central Park Inventory – 9,291,921 SF, Vacancy – 8%, Quoted Rate – $12.93.
South Orange Inventory – 3,942,440 SF, Vacancy – 7.8%, Quoted Rate – $15.16.
Tourism Corridor Inventory – 13,017,838 SF, Vacancy – 6.9%, Quoted Rate – $ 20.38.
Winter Park Inventory – 4,622,728 SF, Vacancy – 3%, Quoted Rate – 21.04.
University Inventory – 4,947,898 SF, Vacancy – 5%, Quoted Rate – $20.
Research Park Inventory – 732,789 SF, Vacancy – 5.8%, Quoted Rate – $20.64.
West Colonial Inventory – 12,101,790 SF, Vacancy – 10%, Quoted Rate – $14.
The information in this report is deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, expressed or implied, may be made as to the accuracy or reliability of the information contained herein. Sources: Integra Realty sources, Reis Observer, Marcus & Millichap, CoStar Group, Inc., Data Quick, Economy.com, Federal Reserve, MBAA, NAR, Real Capital Analytics (RCA), Glenn Mueller, Trepp, U.S. Census Bureau, Urban Land Institute , ICSC, Retail Traffic, Sites USA, Claritas, Retail Planet, US Retail Centers, University of CFL, CBC Worldwide, Moody’s and more.
Sean Glickman is Vice President, Director of The Retail Investment Advisory Group at Coldwell Banker Commercial NRT. He specializes in retail properties in Central Florida and has a Global Real Estate background. His primary focus is on helping clients create wealth through real estate investments. He provides underwriting, advisory and disposition services to some of the largest property owners and developers such as Lamar Companies, Pelloni, Westgate Resorts, Casto Lifestyle, Phoenicia Development, Pelloni Development, The Northeast Companies and many more. | T- 407-571-5532 seanglickman@gmail.com www.CBCworldwide.com
