Unrest in the Middle East? A spike in commodities prices? Concerns over the country’s growing budget deficit?
None of these factors have stopped the U.S. economy from slowly — but steadily — regaining its strength.
And this, according to the latest research report from Marcus & Millichap Real Estate Investment Services, is one reason to believe in a long-awaited rebound for the country’s retail real estate sector.
Marcus & Millichap recently released its National Research Report. A highlight of the report is the surprisingly positive outlook it has for the hard-hit retail sector.
After all, of all the commercial real estate sectors, retail has struggled the most as the U.S. economy fell into its brutal slump.
The Marcus & Millichap report points to several factors to explain why the company’s researchers expect retail activity to begin to pick up in 2011: The U.S. economy continues to strengthen. Corporate balance sheets have improved significantly. Consumer confidence is building. And, best of all, retail sales improved markedly during the 2010 holiday season.
“The drop-off in store closures, the virtual standstill of new spec construction and expansion by stronger tenants were welcome developments last year,” said Hessam Nadji, managing director, research and advisory services, for Marcus & Millichap.
It’s not wise for retailers to start celebrating yet, though. The Marcus & Millichap report points out that not all retailers will see the same level of improvement. Newer developments in outlying areas will be burdened with far higher retail vacancy rates than will in-fill retail developments in established markets.
“The retail landscape is also changing,” Nadji said. “An explosion in online sales has rekindled worries among property owners about the future of certain types of brick-and-mortar retail. The retail property sector consistently reinvents itself, and we expect the industry to continually launch innovative new concepts to draw traffic. Fortress malls in superior locations, for instance, are thriving, having shifted tenant mix surprisingly fast and collaborated with distressed merchants to preserve occupancy.”
In other words, things are better for retail real estate today. This doesn’t mean, though, that challenges don’t await.
Chicago
Retail is set to improve modestly in the Chicago area, but it should pick up more dramatically in 2012 after a year of steady job gains, the firm reports.
The market lost 20,000 jobs in 2010, but employment will expand 1.3 percent this year, adding 52,500 jobs and supporting a 5 percent increase in retail spending.
As in most sectors, recovery will begin in the city, where the report predicts vacancy will fall 30 basis points this year to 7.1 percent. Big news has recently been made in Chicago with Target agreeing to take 125,000 square feet at 1 S. State Street in the Sullivan Center.
Despite activity downtown Chicago, recovery in the suburban markets will take much longer, as many experienced a vacancy increase of 300 basis points during the recession. Because of the suburban weakness, Chicago dropped 3 points to 19 on the firm’s National Retail Index.
Yet led by the strong activity in the city, the overall market should experience positive absorption, dropping to 11 percent vacancy and erasing last year’s gains.
Construction totals will also decrease from last year, with only 1.1 million square feet set to be delivered. Deliveries will include several drugstores and a Walmart.
Overall, the firm predicts that the Chicago market will see a 0.6 percent increase in rents to $18.73 per square foot. Effective rents will advance 1.4 percent to $16.35 per square foot.
-Mark Thomton contributed to this piece
