Scotsman Guide - July 2012 Commercial Edition

Property TypeCast
By Victor Calanog

VICE PRESIDENT OF RESEARCH AND ECONOMICS, REIS INC.

is The re Tail recovery here?

In this past April’s Property TypeCast ( sctsm.in/5032), we suggested that retail fundamentals appeared to be turning the corner. Results from this past first quarter indicate that the retail recovery may have finally arrived.

Occupied stock in neighborhood and community shopping centers increased by 3.141 million square feet this past first quarter. This is the second-largest positive value for net absorption since the sector began losing occupied space in first-quarter ’08 — the largest gain occurred in the previous quarter.

Vacancies began to fall in the first quarter, declining by 10 basis points to end at 10. 9 percent. In the lead-up to the recession, excess building was to blame for the increase in vacancies. Since the advent of the recession, supply growth has been virtually nonexistent, but negative net absorption drove vacancies upward. With supply growth remaining at minimal levels, the swing back to positive net absorption finally reached the tipping point for vacancy this past first quarter.

Source: Reis Inc.

NEIgHBORHOOD AND COMMuNI Ty SHOppINg CENTER TRENDS

Asking and effective rents increased by 0.1 percent, in line with the changes from fourth-quarter ’ 11. This is the second consecutive quarter of rent increases and another cautiously optimistic sign for neighborhood and community centers. All these indicators are positive, yet lukewarm. A nascent recovery may be underway, unless external shocks force U.S. economic growth to reverse course.

Larger properties, like regional malls, posted relatively healthy results this past first quarter, with national vacancies declining 20 basis points to 9 percent. This was the second consecutive quarter of vacancy declines.

Asking rents grew by 0.2 percent, marking the third consecutive quarter of rent increases. Although regional malls are faring better than neighborhood and community centers at this juncture, this has as much to do with supply as demand. Although demand for malls, particularly higher-quality malls, is arguably stronger than demand for neighborhood and community-center space, regional malls did not experience massive supply increases before the recession the way neighborhood and community centers did.

Source: Reis Inc.

REgIONAL AND SupER REgIONAL MALL TRENDS

Although demand drivers like increasing retail sales have helped, the dominant variable fueling the retail sector’s nascent recovery is constrained building. From 1999 to 2008, an average of 29 million square feet of new shopping-center space came online per year. That plunged to 13 million square feet in 2009 and remained low throughout ’ 10 and ’ 11.

More than two years ago, our forecasts suggested that retail vacancies could rise all the way through 2011, emphasizing how the sector was being battered by forces of historic magnitude ( sctsm.in/3476). It is useful to look back and note how the sector has gotten past the worst and may be on its way up from the bottom. We are not projecting a V-shaped recovery, however, and dark clouds remain on the horizon. Reis expects the U.S. economy to grow at a modest 2. 5 percent this year, which means we shouldn’t expect much of a boost from retail spending. Few retail tenants have plans to expand significantly, and many are still closing stores. But because the sector doesn’t have much of a supply glut, vacancies are starting to come down slowly.

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. Juan Bayas, retail analyst for Reis’s quality control department, contributed to this article.

QA&

Thomas S. Bozzuto CHAIRMAN ATIONAL MULTI HOUSING COUNCIL BY RANIA OTEIF Y

Homeownership may be the American dream, but living in rental housing is today’s reality. According to the National Multi Housing Council (NMHC), nearly one-third of American households rent, and more than 14 percent of households live in rental apartments. We spoke with NMHC Chairman Thomas S. Bozzuto about his priorities for the council during his two-year term as chair, as well as his perspective on overall multifamily-market conditions.

What’s your outlook for multifamily?

At least for the next several years, the multifamily rental industry will continue to be strong and get stronger. As we have recovered from the recession, all over the country rents are up, occupancy is up. That has been driven more by the change in the ratio of renters to home-owners than anything else. There will be more of that. Furthermore, the Generation Y population, which has doubled up and which stayed in their parents’ basements during the recession, will be now entering — as they get jobs — the apartment market in force.

The biggest single risk [to recovery] is job growth. We need the economy to continue to recover. If that happens, we will continue to see growth in our industry.

Do current multifamily starts
support the growing demand?

We will see the number of starts continue to increase over the next 18 months because the demand continues to exceed the supply on a national level. In 2010, we had the lowest number of starts in the past 50 years in the apartment industry. There is a substantial deficit of new supply in most markets.

What is the availability of capital
for these starts?

For the most part, developers of substance — developers with experience in strong markets — should be able to continue to get capital and equity participation. There has been up until recently too much of a desire by the banks and the equity [investors] to be concentrated in perhaps half a dozen cities. Now that those cities are beginning to reach something that looks like equilibrium, the capital shall begin to become available for other, smaller markets in the country.

The big issue as it relates to capital is the future of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Ensuring their survival in some form, or at least an orderly transition from government support to private market, is absolutely critical.

What are your priorities as NMHC chairman?

My number one priority is to focus as much as we can on a continued supply of reasonable liquidity to the apartment market in light of the threats to the GSEs. Two, try and use the lessons learned from the economic collapse to reinforce the point we’ve long made that renting is a viable housing alternative and not to be denigrated by public policy. Third, continue to expand our voice on legislative and regulatory issues of concern to the industry.