Fundamentals Hold Up Complete Retail Recovery

CHICAGO-Shoppers are buying, leases are increasing, and closings are slowing while new store openings improve – so why isn’t retail booming? As with most markets, negative fundamentals such as low jobs, high gasoline prices and a down housing market just aren’t good enough to push a full recovery, according to Jones Lang LaSalle in its recent North America Spring Retail Outlook.

National retail vacancy levels have dipped to 7.2%, and investment sales volume totaled $22.6 billion in 2010, up 51% from 2009’s $15 billion. The average price of these retail assets increased in the fourth quarter to $168 per square foot, and retail cap rates have declined about 50 basis points to 7.7%.

Also, where new development was once seen as progress, low development (about 32 million square feet a year) is now seen as positive, as it’s hoped owners will benefit even further from less competition. In the fourth quarter, according to JLL, nearly 21.5 million square feet of retail space nationwide was absorbed, compared to negative 500,000 square feet during the first quarter of 2010.

Finally, retail store openings will pick up slightly in 2011, with retailers planning to open more than 66,000 stores in the next two years, according to JLL. Store closings are predicted to return to 2005 levels, about 4,300 per year.

With all this to back up a positive picture, it’s clear how much jobs and housing hold sway over all markets, including, and maybe especially, retail. Greg Maloney, CEO and president of JLL Retail, tells GlobeSt.com. “There’s no question that things aren’t looking better,” he says. “But there’s still issues out there, such as refinancing debt concerns, unsteady consumer confidence, housing that’s down and unemployment up. These are the negative triggers that are keeping us from a strong recovery.”

On the investment side, Maloney said there’s still the clear desire for quality properties, though pickings are getting slim, and a lack of interest for lesser sites. “We hear that every day, ‘Our criteria is a strong, core major-market asset, and we’re willing to pay a good price for it.’ Well, there’s nothing out there, do you want B or B- property, or in tertiary markets? ‘No, we’re not interested in that.’”

The lines get split even further geographically, though there’s no clear delineation – all markets have good pockets and bad pockets. Some states are doing better than others, however, Maloney said, such as Houston’s solid employment and declining vacancy. “The ones we see some recovery are in California and Florida, but Phoenix and Las Vegas are still struggling,” he says.

A few twists are starting to hit the market, according to JLL. Discount stores, which had enjoyed the wave of penny-pinching consumers during the recession, are seeing flat sales, while luxury stores such as Neiman Marcus and Saks Fifth Avenue are reporting sales increases of 10% to 15%. Also, grocers are returning as the darling of the mall, as consumers seek convenient one-stop shopping. “Lower rental rates and better lease terms now available at malls in most markets are getting attention from non-traditional retailers such as groceries and big-boxes,” said Lew Kornberg, managing director of JLL’s Corporate Retail Solutions division.