Retail Reign Continues

LOS ANGELES-Grubb & Ellis calls the retail investment market “still theone,” Marcus & Millichap says retail is in “an enviable position” comparedwith other commercial real estate segments, and Trammell Crow says theretail investment market “is still red hot.” These are just some of the upbeatassessments of the retail investment market in three new national researchreports by those three companies. They describe retail as one of thesteadiest performers in the commercial real estate investment arena inrecent years and they foresee more of the same, but with some caveats.

The chief caveat in all of the reports might be summed up with, “As theeconomy goes, so goes retail,” except that even a sluggish economy doesn’talways slow retail sales. “Retail has held the enviable position of being theonly core commercial real estate sector to record net income growth throughout the past economic downturn,” Marcus & Millichap points out.Grubb & Ellis echoes the assessment, observing that consumers “cut backonly modestly” on their spending during the recession of 2001 and thejobless recovery of 2002 and 2003. It expects that retail sales will remainstrong, and those retail sales will in turn drive retailer expansions andinvestment sales. Grubb & Ellis cites a recent study from Merrill Lynch thatforecasts new store openings in 2005 to exceed the 2004 total by 23%,which would be the highest number of new stores opened since 1999.

Trammell Crow declares that it is “bullish on retail opportunities across theUS and Canada,” and is especially bullish on Florida, which it considers”one of the nation’s leaders in retail investment opportunities.” Althoughcapital markets are strong and shopping centers are selling very well acrossthe country, the two hottest markets right now for shopping centerinvestments are South Florida and Southern California, Trammell Crowsays. Likewise, Marcus & Millichap expects “further improvement in theretail sector” despite “some consumer risks, including rising interest rates,higher energy costs, a cooling housing market and debt burdens.” The Marcus & Millichap report notes that rent growth has been recorded each year since 1992 in the retail segment, “something not shared by other core property sectors,” the company points out. Since the onset of the downturn in 2001 and through the first quarter of 2005, effective rents for retail properties are up nearly 10%, compared to a 21% decline for office properties and a gain of 2% for apartments, according to the report.

Investors in retail properties are drawn by the steadily rising rental ratesand the demand for space, which are reflected in statistics in the threecompanies’ reports. Grubb & Ellis notes that the average asking rental ratefor high quality in-line shop space in grocery-anchored neighborhoodcenters increased 5% over the past year, the average asking rental rate forpremier urban retail space increased 3.8%, low interest rates are pushingup the prices for pad sites, shopping centers and “nearly all investment real estate.” The company expects rental rates to continue rising, but at amore modest pace.

Aside from their statistical reports on past performance and their forecasts,the three reports also include factors driving the retail market and factorsthat could work against it. Trammell Crow, for example, lists the four keydemographic trends that will drive retail investment across America in thecoming years as Baby Boomers. Gen-Xers, migration to warmer and lessexpensive states, and Hispanic population growth. “Threats to consumerspending in 2005 will likely be the record high debt level, which is seen as along-term problem, and the potential for interest rates to rise,” the reportsays.

In addition to their national outlooks, the reports include a number of regional and city-by-city reports and forecasts, analyses of specific types of retailers and retail centers, and detailed information on rental rates, prices and other elements of retail property investment. They also include detailed information on demographic trends, differences between suburban and downtown projects, and a host of other topics relating to the retail industry as well as investment in retail properties.