Positive Outlook on Retail Real Estate

By Sasha M Pardy, CoStar Group

Reporting on the major trends that took place in retail real estate in 2009, and expectations for the coming year, CoStar Group recently provided clients with a detailed analysis on the retail real estate market. Jay Spivey, CoStar's senior director of research analytics, and Real Estate Strategist Suzanne Mulvee from CoStar affiliate Property &Portfolio Research, presented the findings, tempering the positive overall outlook for the retail sector with the fat that the market is still in the midst of a correction.

"It's still tough going, but things are improving," said Mulvee, nothing that GDP was up in third quarter and is forecasted to grow between 2% and 4% each quarter in 2010, thanks to expected increases in inventory levels and consumer consumption following the extensive government stimulus.

"The housing market is a big factor driving an improvement in the retail sector," added Spivey. "We are expecting to see continued weakness in home prices," said Spivey. That may be a positive, however, because "homes have never been so cheap," which is "luring some buyers back to the market."

Also viewed as a positive was that the average net worth per household "corrected dramatically" during the recession, scaling back to levels in line with 2003-2004. Household wealth is still "relatively high compared to the start of the decade."

Retail segments that have experienced an increase in retail sales since the April 2009 bottom include electronics and appliance stores (+3.8%), general merchandise (+3.6%), grocery (+2.5%), health and personal care (+1.9%), clothing (+1.4%), and non-grocery food and beverage stores (+0.5%).

Forecast

"We will eventually rebound. We're in the midst of a correction. Growth will be positive, but anemic in 2010 and the real uptick will come in 2011," said Mulvee. She warned retail real estate executives not to get too excited about the forecast for 2%-3% growth in retail sales throughout 2010, as there will "still be a bit of a delay between the recovery in the economy and a recover in retail real estate."

The key are of concern for retail landlords remains in the large gap between retailers that are doing well and ones that continue to languish, which makes keeping a strong tenant mix a challenge. "You have to be careful who's in your center," she said, adding that malls seem to have been impacted the most.

With many retailers experiencing positive same store sales growth, Mulvee commented, "A lot of retailers are starting to right the ship and have made some very important corrections to help their cash flows. Retailers got caught with a lot of inventory after the 2008 holiday season, so they didn't buy ahead as much for the 2009 holiday season. This low inventory is good news for the economy and good news for retailers as they think about future growth."