The Lost Year
Dec 1, 2008 12:00 PM, By Elaine Misonzhnik
As a result, retail property fundamentals will take a hit in 2009 — the vacancy rate is expected to peak next year at 17.3 percent, according to PPR, while rent growth will decline 5.6 percent, after a 3.6 percent decrease projected for this year. The firm does not expect a retail sector recovery until 2010, making it unlikely that retail will become the favored property type for real estate investment next year.
At the same time, deteriorating property fundamentals might help bring about some distressed asset opportunities for cash-flush vulture funds, according to Warner. With one retailer after another closing stores and not a lot of alternative users emerging to take up their spaces, many landlords will find themselves in a position where they will have to offer rent relief to their tenants, says Haddigan. If the landlord has debt maturities coming up in 2009, however, that might turn into a problem. Facing pressure from the lender to pay back the loan and simultaneously experiencing rent flow shortfalls, the landlord might have one of two choices: either put more equity into the financing deal or put the property on the sales block, Haddigan notes.
That might result in some attractive opportunities for distressed asset buyers, but the rent shortfall problems will affect primarily class-B properties in secondary markets, according to Haddigan. Most opportunistic investors, however, will want class-A locations in primary markets, says Taub. “If you are buying fundamentally sound real estate, at the right pricing, with [below market] rents, then you'll be able to make a good return and you'll be able to increase that return as the market recovers,” he notes.
The Numbers Game
Though most industry researchers agree 2009 will be a tough year for the retail real estate sector, they still haven't agreed on exactly how much damage the current recession will cause.
For example, Boston-based Property & Portfolio Research (PPR), has some of the most bearish projections on retail real estate, expecting the national vacancy rate to climb 17.3 percent, while projecting rents to 5.6 percent. PPR bases its forecast on surveys of all retail properties greater than 30,000 square feet across 54 U.S. markets.
Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm, predicts a less drastic turn in property fundamentals. Marcus & Millichap, which tracks all retail centers greater than 10,000 square feet throughout the U.S., expects vacancies to reach 13.0 percent next year, while expecting rents to fall decline 1.2 percent.
Finally, Reis Inc., a New York City-based commercial real estate information provider, projects a vacancy rate of 9.9 percent for 2009 and a rental rate decrease of 0.6 percent. However, the firm's numbers take into account only neighborhood and community shopping centers and power centers greater than 5,000 square feet in size. Its information is based on surveys of 76 major markets across the country.
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