U.S. Retail Markets Improving, Albeit Slowly

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The retail real estate market is on the mend, albeit slowly. That is the message from CBRE research and Abigail Rosenbaum, senior economist with CBRE Econometric Advisors, based in Boston. 

Rents will be increasing in the fourth quarter, says Rosenbaum. "We have seen availability (vacancy) rates stabilizing and rent growth will be fairly positive, because of a demand recovery," she says, offering as evidence for this prediction the fact that there have been four consecutive quarters of positive demand for space. (CBRE focuses mainly on community and strip centers.)

July was a good month for retail, according to CBRE's second quarter report, "US Retail Snapshot." "In July, people starting to think about back to school, but mostly it was the housing-related segment that helped sales," says Rosenbaum. "The discretionary segments were not the leaders."

According to the CBRE report, the fact that July saw better than expected retail sales "bolsters expectations that consumer spending will recover in the second half of 2012 after the summer doldrums." 

"We expect the availability rate in the third quarter, nationally, to be 12.8% for neighborhood and grocery-anchored centers," says Rosenbaum. These are the only kinds of centers for which CBRE has enough data to do forecasting, she says.

Average retail rental rates in the third quarter are essentially flat at about $18.69 per square foot, which is down .1% from the second quarter, says Rosenbaum.

"The takeaway story (for retail) is that availability rates are quite elevated compared to before the recession.  As for consumer behavior today, those who shop at luxury stores will continue to do so. But discounters are not seeing a lot of traffic, because people don't spend like they used to," says Rosenbaum. "There have been signs that Macy's and other mid-scale department stores are doing OK and will continue to be OK, as long as there is consumer confidence, which we see right now," even though unemployment is still high and there is a crisis in Europe, she says. There has been a consumer recovery for a couple of years now, says Rosenbaum.

Still, there are challenges. The internet is affecting retailers, not just because it is taking away sales, but because stores that offer merchandise online themselves no longer need as much in-store inventory and as much space, says Rosenbaum. As a result, store sizes, especially for big boxes, are getting smaller, she says.

Stores like Office Depot and Walmart are downsizing their stores, says Rosenbaum. "Walmart Express," a smaller version of the old Walmart big box stores that the company is beginning to build, have about 40,000 square feet, compared to older Walmart stores that have about 140,000 square feet, she says. Those larger prototypes are not being built as much as they had been in the past, says Rosenbaum. 

In a second quarter CBRE retail report mentioned above, the author describes the predicament of the brick-and-mortar store this way: "E-Commerce continues to place 'brick-and-mortar' retail under increasing pressure, although the two are not always mutually exclusive. The latest phenomenon impacting traditional retailers has been 'show-rooming,' where consumers come to stores to assess the merchandise, but then order online at a discounted price. According to Forrester Research, three areas of focus will dominate traditional retailers, who are increasingly confronted with online competition: the growth of mobile device usage, heightened competition from Amazon.com and continued shifts in market share toward web retail."

"Part of the reason that absorption figures in existing shopping centers are muted, is that many retailers are not focusing on new stores, but instead on remodeling the stores they have," says Rosenbaum. In light of the current retail environment, caution and efficiency are more on the minds of retailers than building new stores, she says.