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Retail Prices Rise

March 5, 2014

The retail sector provided stable performance in 2013. Consumer spending remained steady through the year and notched a noticeable gain in the last quarter, as households’ wealth received a much-needed boost from both financial and residential housing markets. Retail sales were up 4.2 percent in 2013 compared with the prior year, driven by a 9.8 percent gain in auto sales and a 5.9 percent rise in sales of building materials.

With consumer dollars flowing into stores, demand for retail space was robust. The fourth quarter 2013 saw net absorption total 4.5 million square feet—the highest level since the fourth quarter 2007, according to Reis. Meanwhile construction of new retail proper-ties also reached a new high since the fourth quarter 2007, totaling 2.1 million square feet. However, with demand outstripping supply by a wide margin, vacancy rates declined 10 basis points in the fourth quarter. Re-tail vacancies were down 30 basis points in 2013 com-pared with 2012. Asking rents for retail spaces rose 0.4 percent in the fourth quarter, and advanced 1.4 percent for all of 2013.

With strengthening fundamentals underpinning the continued recovery in retail markets, investors maintained a measured pace of acquisitions. Sales of major properties rose 8 percent in 2013, totaling $60.8 billion, based on data from Real Capital Analytics (RCA).

A welcoming development was the broadening of investors’ appetite for risk, as capital flows moved into secondary and tertiary markets and into strip centers. Sales of strip centers and single-tenant retail buildings rose 26 percent on a yearly basis, outpacing sales of regional malls.

In another sign of improving conditions, portfolio transactions comprised a larger share of deals in 2013. Portfolio sales jumped 23 percent in 2013 from the previous year, while individual property sales declined 1 percent. Portfolio transactions were topped by Black-stone Retail’s $1.5 billion acquisitions in multiple locations, followed by Westfield Retail’s $1.4 billion in deals. On the individual side, significant transactions occurred in markets across the country, signifying broad-based interest in all tiers. The top deal was Macerich’s acquisition of the Green Acres Mall in Valley Stream, NY for $500 million. The other top deals were for Water Tower Place in Chicago, the Lloyd Center in Portland, the Hollywood & Highland Center in Los  Angeles and the Piaget Building Retail Condo Lease-hold in New York.

Investors’ shifting preference for riskier deals became more pronounced in 2013, as cap rate compression in major cities continued and smaller markets offered comparatively much better returns. The national aver-age capitalization rate for retail spaces was 7.0 percent in 2013, 20 basis points lower than 2012, according to Real Capital Analytics. In the six major markets tracked by RCA, cap rates averaged 6.3 percent, while in the rest of the markets, cap rates averaged 7.3 per-cent.

While Los Angeles and Chicago topped the list of markets by dollar volume, with $3.6 billion in transactions each, secondary markets witnessed the largest boost in investments. Ranked by growth, Cincinnati posted growth in sales of 251 percent in 2013, leading a list of cities which recorded triple-digit gains—Long Island (223%), Austin (179%), Portland (155%), Las Vegas (147%), and St. Louis (106%). In a positive development, retail investments during 2013 advanced across all markets and regions, both in terms of volume and prices.

Adding to the positive trends, outstanding retail distress declined 14 percent in 2013, to a total of $22.8 billion. Compared to the $72.1 billion in retail defaults  which occurred in the wake of the 2008-09 recession and financial crisis, the current levels are manageable, especially considering the 63 percent rates of return on distressed loans. Sales of distressed retail properties made up less than 7 percent of total volume in 2013. The CMBS sector retains the largest volume of retail distress, at $14.6 billion, followed by domestic banks,  which hold $4.0 billion.

With capital availability rising and diversifying, coupled with improving fundamentals the 2014 outlook for retail markets is positive. Global consumer retail spending is expected to be stronger this year, particularly in U.S. and European markets. In addition, investors have clearly signaled that the much-expected recovery in smaller markets is well underway.