First Look – The National Retail Outlook: Set For Growth in 2012

Fall 2011

Despite a swooning overall economy, the U.S. retail sector continued to show modest signs of recovery during the second quarter. While the overall vacancy rate for all shopping center types including malls remained at 9.4 percent (the same level where it has stood since the fourth quarter of 2010), the market did manage to record occupancy growth.

The market absorbed just over 3.4 million square feet of space during the second quarter of this year. This is despite the fact that retail continues to face significant headwinds. The bankruptcies of Blockbuster and Borders alone have returned over 10 million square feet of space to the market so far this year and could result in as much as an additional seven million square feet of product going dark before it is all over. Yet, the market has remained in positive territory, albeit modestly positive territory.

The New York City market led all others in terms of boasting the lowest overall shopping center vacancy with a current rate of 2.3 percent. The markets that recorded the lowest shopping center vacancy levels this quarter were all either in the Mid-Atlantic Seaboard or the Pacific Region. Following New York, the top performing markets included: Hawaii (3.3%); San Francisco (3.8%); Miami (5.3%); Washington, DC (5.6%); Los Angeles (5.8%); Boston (6%); Oakland (6%); Orange County Calif. (6.1%); Pittsburgh (6.5%); San Diego (6.5%); and San Jose (6.6%).

Midwestern, Southern and Inland Western markets are still experiencing the highest levels of shopping center vacancy. Birmingham led the pack with a vacancy rate of 14.2%. Other U.S. markets with elevated vacancy levels include: Phoenix (13.9%); Reno (13.6%); Las Vegas (13.4%); Memphis (13.3%); Cincinnati (13%); Atlanta (12.6%), Milwaukee (12.5%); Sacramento (12.1%); and Detroit (12%).

In terms of new construction, the Washington, D.C. market led all others with just under 1.5 million square feet of space added in the second quarter. Philadelphia followed with nearly 680,000 square feet of deliveries. This marks the lowest level of new shopping center construction to be delivered on record. Over the past 10 years, this number has averaged closer to 30 million square feet per quarter. That being said, the development pipeline is beginning to ramp up again in some of the stronger U.S. markets. Philadelphia currently has roughly 1.8 million square feet of space in the delivery pipeline. Boston, Los Angeles and Raleigh all have over half a million square feet of product under development.

What does the future hold? Look for the market to continue to record positive occupancy growth over the remainder of the year. While the market will continue to face challenges from an anemic recovery, job growth is expected to improve over the final half of 2011. More importantly, retailer demand is up. While the ongoing Borders bankruptcy and others will certainly result in additional space being returned to the marketplace, gains from expanding retailers will surpass these occupancy losses. According to the most recently completed Chainlinks Retailer Demand Survey, retail demand has increased in virtually every U.S. market over the past year. The Chainlinks survey is submitted to over 600 brokers in 60 markets and rates current retailer demand on a scale of one to 10 (with one representing no demand and 10 representing record levels of demand). One year ago this number stood at four, it now stands at seven.

Modest occupancy growth is forecast for the final half of 2011. Vacancy levels will probably post declines as well; however, they will likely be measured by basis points — not percentage points. In summary, the worst of the retailer bankruptcies are behind us for now, with growth expected to further escalate heading into 2012.