Retail Market Overview 2009-Featured in 1/09 Properties Magazine
Black Friday numbers were weak and for many retailers, this will be their last holiday season in business. Several retailers had credit lines terminated before Thanksgiving and were unable to purchase inventory to sell during the holidays. Their fate has been sealed and liquidation is the only option. It comes as no surprise that U.S. retail store closures are at a six-year high and vacancy rates are expected to increase substantially. Regional malls and power centers are expected to experience the highest increase in vacancy followed by lifestyle and grocery anchored shopping centers. Northeast Ohio will experience vacancy increases in all counties making up the Cleveland Metropolitan Statistical Area. Asking rental rates are expected to fall by 20% or more and motivated shopping center owners could include tenant improvement allowances that will not be amortized into the lease. The landlord market that has existed since 2002, which drove grocery anchored centers’ rental rates into the mid $20’s for secondary markets and mid $30’s for primary markets, is no longer sustainable.
Unsophisticated or neophite investors acquired triple net leased assets in Northeast Ohio at a record pace over the past five years. The investment medium provided a predictable income stream and a fixed rate of return. Many of these triple net leased assets are occupied by casual theme restaurants, the single most affected retail sector in this recession. As casual theme restaurants file bankruptcy and reject leases, look for owners to try and replace the tenants with regional or local restaurant operators to take advantage of the existing infrastructure and maximize value. If a restaurant tenant cannot be identified, look for owners to return the property to the lender for the value of the land.
Retail activity will slow dramatically in 2009, except for a couple of retailers. Trends to look for will include, automotive aftermarket, discount stores, and contractually obligated franchisees actively pursuing and consummating deals in 2009. Expect new construction activity to be at the lowest levels in more than a decade. On a positive note there will be opportunities amid the recession. Shopping center acquisition opportunities will become more transparent in the first and second quarter of 2009. Investors familiar with purchasing mortgage instruments are the most likely beneficiaries of this real estate cycle. Investors with cash will have the opportunity to acquire discounted assets from highly leveraged organizations. In closing the recession will facilitate a correction that is necessary for a sustainable real estate market to prosper.