Property TypeCast
By Victor Calanog
VICE PRESIDENT OF RESEARCH AND ECONOMICS, REIS INC.
retaIl fundamentals contInue to skId along the bottom
Figures from this past third quarter show retail fundamentals have yet to demonstrate consis-
tent signs of improvement. Neighborhood and community-center vacancies remained moored
at 11 percent, unchanged from the second quarter. This is a level unseen since 1991, and it is
only 10 basis points shy of the all-time record high of 11.1 percent, which the sector hit in 1990.
National asking and effective rents also remained unchanged in the third quarter; at $16.49
per square foot, effective rents are now back to levels last observed in mid-2005, an indica-
tion of how much ground retail properties have lost since fundamentals began deteriorating
in early 2008.
Larger property types, such as shopping malls, did not remain unscathed. National vacancies
rose to 9. 4 percent this past third quarter, the highest level on record since Reis began tracking
this property type in 2000.
Asking rents rose slightly,
but mall rents have eroded
back to levels last observed
in early 2006.
NEIGHBORHOOD AND COMMUNIT Y SHOPPING CENTERS
By contrast, other com-
mercial property types are
at least showing signs of
a fledgling recovery. Of-
fice vacancies have ticked
downwards slightly, from
17. 6 percent at the end of
2010 to 17. 4 percent this
past third quarter. Office
rents also have increased
for four straight quarters,
albeit at a tepid pace. Apartment fundamentals are roaring back vigorously, with vacancies
dropping by 100 basis points in 2011 alone, down to 5. 6 percent in the third quarter.
Source: Reis Inc.
Why is retail ailing? First, recession has wreaked havoc on the demand side of the equation.
For the first time in almost 20 years, American consumers pulled back on spending. Although
the recession ended more
than two years ago, cau-
tion continues to pervade
spending habits. Retail
sales may be creeping
back up, but this has yet to
translate into increased de-
mand for retail space.
REGIONAL AND SUPER-REGIONAL MALLS
On the supply side, while
office and apartment con-
struction pulled back be-
tween 2004 and 2008,
retail-inventory growth con-
tinued at a fairly healthy
pace of around 1.6 percent
per year — until the bottom
fell out in 2009. As such, aggregate demand remains slow, office and apartment properties do
not have to contend with the kind of supply glut that bedevils retail properties today.
Source: Reis Inc
Not all retail properties are suffering. Power-center vacancies have been declining slightly for
about a year and grocery-anchored shopping-center vacancies fell to 7. 6 percent in the third
quarter. Malls that can charge rents at the top 75th percentile of their specific metros also are
boasting vacancies well below the national average.
Retail properties are still ailing, however. It doesn’t help that forecasts of gross-domestic-
product (GDP) growth in 2012 have been cut from around 3. 5 percent to 1.7 percent, given
Europe’s turmoil and the lackluster economic performance for most of 2011 in the U.S. Inves-
tors and lenders must set expectations carefully for how retail properties will perform in the
near term.
Victor Calanog, vice president of research and economics at Reis Inc. ( www.reisreports.com), writes a monthly column
on property types for Scotsman Guide. 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@reis.com.
ryan severino, senior economist for Reis, contributed to this article.
QA&
Stephen M. Renna CEO CRE FINANCE COUNCIL
BY RANDALL WOODS
The CRE Finance Council (CREFC) is focused on rep-
resenting the global commercial real estate finance
industry and serves as a legislative and regulatory
advocate. We talked with Stephen M. Renna, CEO of
CREFC, to discuss where the commercial real estate
market is headed and what regulatory and financial
challenges he expects this year.
What are the legislative concerns of CREFC
currently?
The first is what Congress is going to do with respect
to the debt crisis and how they are going to meet
their spending-cut mandate. There recently has been
legislation introduced with respect to government-
sponsored enterprises (GSEs). What you do with the
GSEs is going to be important to the economy over-
all, but more specifically, Fannie Mae and Freddie
Mac have multifamily programs, which — unlike the
single-family programs — have been very profitable.
Legislators need to understand that an important el-
ement of Fannie and Freddie is multifamily.
Are you concerned about Dodd-Frank risk-
retention rules?
We believe in risk-taking in the market. As long as
you’re informed, you should be allowed to take risks.
We also don’t see the [premium cash capture reserve
account] requirement as workable in any way and will
be quite disruptive to the origination side of the [com-
mercial mortgage-backed securities] sector.
Are loan modifications playing a role in this
market?
You’re starting to see an increasing amount of loan
portfolios getting worked out. We still have a lot of
extensions being done, particularly by the banks, but
it’s very institution-specific. Lenders have seen which
loans were the ones that were going to hold their own
and which ones have deteriorated to such a point that
you say, “I’ve got to cut my losses on this one.”
Will Europe’s debt crisis affect U.S. commer-
cial real estate?
Whenever you have a crisis, that’s where opportu-
nity is born. There are a number of private-equity
companies that are expecting European banks to
start disgorging a lot of their commercial real es-
tate mortgages because regulators want to get the
banks out of the real estate market.
What opportunities do you see coming out of
this market?
Balance-sheet lenders, particularly life-insurance
companies, are doing well, and they expect to do well
this year. The distressed market, too, has really been
quite active, whether it’s providing rescue capital or
workouts or special types of capital, taking over as-
sets and repositioning — it’s starting to happen. The
bottom line is: Real estate is going to be as healthy
as its tenants and the under writing on the financing.
Randall Woods was an editor at Scotsman Guide.
For questions on this article, call (800) 297-6061
or email articles@scotsmanguide.com.
