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Retail Leasing Market to Stabilize in 2010, but Rent Growth Won’t Materialize for Two Years

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Market researchers predict that retail real estate fundamentals will start stabilizing in 2010. But don’t expect miracles—it will take several years, up until 2012, before the industry will see any appreciable rent growth, they note.

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The availability rate at U.S. neighborhood and community shopping centers will reach its peak in the third quarter of 2010, at 12.8 percent, according to a new report from CBRE Econometric Advisors, a Boston-based research firm. Reis Inc., a New York City-based research firm, predicts it might take even longer, until 2011, for vacancy rates at neighborhood and community shopping centers to peak, somewhere around 12.2 percent.

Both firms cite the precarious job market and too much supply built in the previous decade as reasons for the prolonged recovery. Between 1999 and 2008, the U.S. retail industry added anywhere between 25 million square feet and 30 million square feet of new neighborhood and community shopping center space to the market on an annual basis, says Ryan Severino, an economist with Reis. This year, the volume of new anchored neighborhood and community center completions will likely be much lower, around 2.5 million square feet, according to CBRE Econometric Advisors,—but it will take a while for retailers to absorb all the currently available space in today’s economic climate.

“We expect absorption to stop declining because there aren’t really supply risks in 2010,” says Abigail Marks, an economist with the firm. “I just think in 2010 we are not going to see a recovery as a whole. But certainly we’ll start to see things improve and then absorption will turn positive in the fourth quarter.”

In fact, Marks expects that by the end of 2011, the availability rate at neighborhood and community shopping centers will decline only 40 basis points from its peak, to 12.4 percent. Rent declines in the sector will likely continue through 2012, dropping 2.9 percent this year and 0.4 percent in 2011. In 2012, however, the industry might experience a rent increase of approximately 1.5 percent, in Marks’ estimates. The researchers at Reis forecast a year-over-year increase of 0.5 percent in 2012.

“Our forecast is based on what we think will probably be a somewhat depressed retail sales environment,” says Severino. “Median household income is not going to be growing at a fast pace. We just think all of those things are going to weigh down on the demand side.”

Overall retail vacancy, including neighborhood shopping centers, power centers and regional malls, will likely jump another 70 basis points this year, to 10.6 percent, according to Marcus & Millichap Retail Real Estate Services, an Encino, Calif.-based firm. Last year, the vacancy rate rose 160 basis points. Overall asking rents will likely decrease 2 percent, while effective rents will drop 4.2 percent, Marcus & Millichap researchers forecast. The properties most affected by the declines will be those completed after 2005, as they have leases that are now 30 percent to 40 percent above average market rates, the firm notes.

Last year, as a result of all the rent concession requests, effective rents declined 7 percent.

—Elaine Misonzhnik

An ACRES Real Estate Services, Inc. Company