By Victor Calanog
vice president of research and economics, reis inc.
RETAIL FUNDAMENTALS FEEL THE PAIN
In this past January’s Property TypeCast ( sctsm.in/4423), we speculated on whether the retail
sector was nearing its bottom. Fourth-quarter data show that vacancies did indeed remain flat
at 10. 9 percent, with asking and effective rents declining slightly — by 0.1 percent. There are,
however, some worrisome signs that the worst is not yet over for retail properties.
The main reason retail vacancies remained flat in the second half of 2010 is the severe pull-
back in new construction. Only 4.1 million square feet of new space came online last year, the
lowest annual figure for new completions in 30 years of Reis data. Aggregate demand was still
not robust enough to lift many sectors in the economy, as gross domestic product (GDP) grew
by only 3 percent and job creation was a paltry 909,000 for all of 2010.
With aggregate demand remaining relatively weak, reduced supply contributed to less of a
glut that retail needed to deal with.
Reis had forecasted that more than 11 million square feet of new space would come online
in 2010. What happened
to the remaining 7 mil-
lion square feet of new
RETAIL NET ABSORP TION AND VACANC Y
Some were delayed indefi-
nitely or were reduced in
scope. Properties that were
supposed to have delivered
100,000 square feet of new
space were scaled down
to 50,000-square-foot cen-
ters. The vast majority of
projects, however, were
simply delayed to this year.
This means that unless de-
mand for retail space really ramps up early in 2011, the sector will have to deal with an unwel-
come deluge of new properties — from those that were originally scheduled to come online
this year and those that were delayed from last year. This is one of the main reasons we expect
vacancies to increase past the 11.1 percent record last observed in 1990 before beginning to
decline sometime late this year or in early 2012.
Reis expects GDP growth to improve in 2011, ramping up to between 3. 5 percent and 4 per-
cent. Unless turmoil in the Middle East derails job creation, we can expect anywhere from
2.2 million to 2.5 million jobs to be created this year.
There was a temporary dip
in growth in retail sales in
the brutal winter months,
but if faster economic
growth results in more
jobs created, then retail
sales figures may improve
12-MONTH CHANGE IN RETAIL SALES
This will benefit many sec-
tors in commercial real
estate. Unlike the office
sector, which benefited
from a favorable supply
situation before the reces-
sion, there was overbuild-
ing of retail properties. This will delay any vacancy declines or rent increases for the retail
sector until later this year or early next year. Retail fundamentals were relatively stable in the
latter half of 2010, but it seems the pain that was postponed must be dealt with before recov-
ery can truly ensue.
vice president of research and economics at Reis Inc. ( reisreports.com), writes a monthly col-
umn on property types for
He and his team of economists are responsible for data models,
forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at victor.calanog@
senior associate for Reis’ research and economics department, contributed to this article.
byjennifer e. garrett Jennifer E. Garrett is an associate editor at
. Reach her at (800) 297-6061 or email@example.com.
executive vice president,
The multifamily sector has been a bright spot not
only for the commercial real estate market as a
whole but also for government-sponsored enter-
prise (GSE) Fannie Mae. As of the second quarter
of 2010, Fannie’s multifamily serious-delinquency
rate was just 0.8 percent, and the division made
about 2,300 loans this past year. GSE reform is
looming, however. Fannie’s executive vice president
of multifamily, Kenneth Bacon, tells us what’s next
for multifamily and why the GSEs are important to
What was 2010 like for Fannie Mae’s multi-
We had a good year. [Delegated Underwriting and
Servicing] lenders and their affiliates delivered
about $17 billion in loans to Fannie Mae. I feel great
about not only the quality of the business but also
the fact that we were able to put about 90 percent of
it into mortgage-backed-securities form and sell it. I
think it was a good example of us stepping up and
providing some liquidity.
Fannie now has a 20 percent share of the
outstanding multifamily mortgage debt,
which is an increase over previous years.
Why is that?
In the past three or four years, it’s really been Fannie
and Freddie Mac that have been there to support the
market. [Commercial mortgage-backed securities]
issuance shut down. There were still a few life com-
panies out there, but their demand in multifamily
was limited. We did what we were supposed to do;
that is, we provided liquidity at a time when other
people exited the market. I think our market share
went up to reflect that. As other people come back
into the market, that might change.
What kind of market do you anticipate this
I think we will see more activity in the market this
year. We’re seeing occupancy rates increase, and
we’re seeing concessions burn off, so that bodes
well for the value of apartments. I think you’ll see
more transactions; I think you’ll see more starts;
and you’re also going to see more competition
How is potential GSE reform affecting your
We’re doing deals. [ The report that came out in Feb-
ruary] said the things that work and that didn’t work.
I felt good about what I read in the report on rental
housing in general and about the role that we play
in it. I told my staff and my customers that we’re still
in business. I’ll leave it to Congress to determine
our future, but meanwhile, families need a place to
live, so the best thing for us to do is to make sure we
keep doing our work.
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