Economic Variables Continue Pressure on Retail

MBA (7/24/2008 ) Murray, Michael
Changing variables—cautious consumer spending and unknown tenant positions—will present major challenges for shopping center owners and pressure on retail properties for the remainder of this year and into 2009, industry analysts said.

“With market conditions eroding, the balance of power between tenants and landlords is shifting,” according to a report from New York-based Cushman & Wakefield. The report, Changing Tides: Outlook for the Retail Sector, said few deals closing have yet to reflect any major pricing correction.

Nationally, retail prices were off by 5.5 percent from their peak in the first quarter of 2007 while brokers reported a 10 percent to 20 percent gap in buyer and seller pricing expectations, enhancing a stalemate between the parties.

“After years of strong rent growth and ever-lower cap rates, shopping center owners are feeling the heat of a weakening market. The national vacancy rate for neighborhood and community shopping centers in the first quarter rose to the highest level since 1996. Unstable market conditions have strengthened the bargaining position of retail tenants, yet they face many challenges of their own as gloomy consumers curb their spending,” the report said.

Fitch Ratings, New York, said the retail sector remained under pressure as overall delinquencies mildly increased, but retail showed a net delinquency increase of $70.5 million.

“An increase in retail bankruptcies and a continued decline in consumer disposable income are evident, though they have yet to impact retail performance,’ said Susan Merrick, managing director at Fitch.

Declining housing markets in California and Arizona, however, caused sales to deteriorate for the Hayward, Calif.-based Mervyn’s department store chain—operating 177 stores in seven states—and an article in the Wall Street Journal said the company could file for bankruptcy.

“If Mervyn's faces liquidation, malls already downtrodden from closings such as Linens 'n Things and Sharper Image would suffer even more,” Realpoint LLC, Horsham, Pa., said in a recent report.

Realpoint found 525 Mervyn’s loans with a combined $1.8 billion property-level loan balance in 36 CMBS transactions. The overwhelming majority of Mervyn’s loans were in seven transactions with 25 or more loans each, the report said.

Realpoint said Mervyn’s occupied 100 percent of the space in the collateral securing 30 percent of the loans by balance, or 94 percent of the locations by loan count, but none of the properties are less than 80 percent occupied. More than 50 percent of the loans are on collateral in California and all are current.

In an earlier report this month, Realpoint said that Starbucks closing 600 stores would have a “minimal” impact on CMBS because the stores occupy a small gross leaseable area (GLA).

Analysts at Property & Portfolio Research Inc., Boston, reported retail around the country facing pricing pressures and rising vacancies, particularly in the Midwest.

In Ohio, oversupply and waning demand will send Cincinnati retail vacancies up 170 basis points in the next year from its first quarter 18.4 percent economic vacancy rate—without recovery until 2012, said Stephanie Hession, analyst at PPR.

Columbus, Ohio retail vacancies were up 30 basis points to 17.1 percent by the end of the first quarter, and PPR forecasts the economic vacancy rate for Indianapolis retail to increase 140 basis points in the next year.

"The one-two punch of major deliveries and slowing retail sales will knock down near-term fundamentals" in Indianapolis, said Jeff Myers, analyst at PPR.

Shaw Lupton, PPR analyst in Milwaukee, said a weak economy, softening retail demand and the tail end of a wave of new supply all pose serious threats.

“As consumers slam the brakes on spending in 2008, economic vacancies are expected to worsen considerably,” Lupton said.

Richmond, Philadelphia and Portland averaged 6 percent to 9 percent in retail economic vacancies, but Salt Lake City and San Diego face greater pressures, analysts said.

PPR analyst Aaron Jodka forecast the Salt Lake City market to post its worst total returns ever as value losses continue.

In San Diego, retail deal volume totaled $177 million in the first quarter, below the market's quarterly average of $237.3 million since 2004.

"A correction in pricing of retail properties in San Diego is imminent. San Diego's retail property values have grown fast over the past few years, but values are now facing mounting downward pressures," said Matthew Mowell, analyst at PPR.