Monday, February 12, 2007

2007 Retail Report

The year of 2006 can be remembered as a year when developers and retailers made a commitment to investing back into the City of Cleveland. Total new construction accounted for an additional 2.8 million square feet of retail in Northeast Ohio, more than one million of which was built in the City of Cleveland. Our research indicates that this trend will continue and that additional retail will grow in neighborhoods like, Collinwood, Cudell-Edgewater, Little Italy, and West Park. This doesn’t mean that developers will abandon the suburbs, county seats or bedroom communities in Northeast Ohio, quite the contrary developers will continue to focus on developments that provide the path of least resistance from municipalities and the greatest returns. In addition several communities in Northeast Ohio are vying for what may be the southern compliment to Legacy Village and Crocker Park. Brecksville has the greatest chance of landing a lifestyle development due to its’ excellent demographics and interchange access. If past history is any indication of the future the residents of this community would rather the project be developed in someone else’s backyard.

The Greater Cleveland retail market has surpassed more than 75 million square feet of retail space accounting for more than 22 square feet of retail space per person. This amount is slightly higher than the national average of 20.3 square feet per capita. That being said most of the counties that comprise Northeast Ohio have very healthy occupancy rates. The healthiest county is Lake County with a vacancy rate just over six-percent (6%), followed by Medina County at seven-percent (7%). The low vacancy rates in these counties can be attributed to above-average absorption, sustainable developments and the lack of large functionally obsolete malls like those found in Cuyahoga and Summit Counties. There is one county that has an alarming vacancy rate of more than twenty-percent (20%); Geauga County. However, projects in Bainbridge and Chardon have added more than a million square feet of retail in the last three years. Geauga County’s gross leasable area (GLA) is north of 2.5 million square feet, so these projects account for almost half of all the GLA in the entire county. Assuming residential sprawl continues and shopping center owners aggressively market their properties, I anticipate the vacancy rates in Geauga County to be significantly lower next year.

A lower vacancy rate is only one of the trends likely to occur in 2007. There are several trends to be prepared for in Northeast Ohio. In no particular order I have summarized the trends that will have the greatest impact on the retail real estate market.
• Discount Stores will try to reposition. Box stores will be active relocating stores when they do not own their own real estate and/or cannot expand into a larger format on the existing site. Box stores will also be active in county seats as well as in-fill markets.
• Both Drug stores and gas stations with the convenience store component will be aggressively opening new locations
• Single tenant NNN leased assets will continue to be a desirable investment vehicle, obtaining in some cases sub-7% cap rates.
• Retail shopping center sales should increase as investors pursue alternative product with better forecasted returns such as apartments and industrial buildings.
• Moderate to low rental rate increases.
• Operating expenses will increase as owners try to make up for low to moderate rental rate increases.
• Regional malls will continue to maximize land density ratios in order to compete against Lifestyle centers.


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