October 21, 2009

By George Ratiu, Research Economist

Commercial retail space has been in a decline, following significant contractions in demand. On the investment side, the number of retail properties changing hands has been in a steady decline since 2007. The decline has been slowing down, but with distress at the highest level of all core property types, the retail sector is still struggling to find a bottom.

Sales of major retail properties declined 16.4 percent in the second quarter of the year, from the first quarter. There were 139 properties that traded hands for a quarterly total of $1.6 billion. The downturn was driven by a 33.0 percent decline in mall property transactions. By comparison, strip center deals declined 6.0 percent in the second quarter.

Based on transaction data collected to date, the third quarter is likely to match the second quarter's volume, mostly on higher dollar value mall deals. Through August, there were 85 properties traded for a total of $1.3 billion. The number of retail transactions continues to be small, leading to volatility in pricing data. Based on Moody's/REAL Commercial Properties Price Index, prices for retail properties declined 18.5 percent in the first quarter compared with the previous year. Meanwhile, during the second quarter, average retail prices actually rose ten percent, to $174 per square foot. However, based on preliminary data for the third quarter, prices are hovering around the $172 per square foot mark.

Weighing the data for the first half of 2009, the retail market faces a large amount of unsold inventory. There were $15.1 billion of retail properties offered for sale versus $3.5 billion closed in the first six months. Cap rates moved up 20 basis points in the first half of the year, and have been rising to around 7.7 percent in the third quarter.

Regionally, there were 10 markets that posted no sales activity in the first half of the year-DC, Columbus, Detroit, St. Louis, Long Island, Stamford, Charlotte, Memphis, Miami, and Salt Lake City. Based on the volume of transactions in the first half of 2009, the most active market has been Dallas, with 12 retail transactions, totaling $253 million. The other active markets, by sales volume, include Atlanta ($183 million), Inland Empire ($178 million), Orange County ($148 million), Northern New Jersey ($114 million), Seattle ($108 million) and Manhattan ($104 million).

 

Retail Transaction Activity
Closed H1 2009
Region	Volume ($M)	Average Cap Rate	Average P/SF
Mid-Atlantic	$214.2	7.7%	$156
Midwest	$222.5	7.5%	$67
Northeast	$612.2	6.8%	$186
Southeast	$879.9	8.3%	$131
Southwest	$436.1	7.5%	$290
West	$825.9	6.6%	$183
Source: Real Capital Analytics, July 2009

 

While sales activity improved in the first half of the year, the volume of distressed properties also rose. Lack of credit continues to plague commercial real estate refinancing. In turn, the volume of troubled properties jumped by 122.0 percent in the first half of the year to over 6,000 properties, worth $114.6 billion. Distressed retail properties accounted for 1,638 properties totaling $32.3 billion-by far the largest share of commercial distress. The retail data represents a 161.0 percent increase in distress for 2009.

Analyzing the regional distribution of retail distress reveals that the West has the largest volume of troubled assets-326 properties worth $8.3 billion-with Hawaii accounting for $1.8 billion of that volume. Meanwhile, there are several metro areas where the volume of retail distress is large and growing. After Hawaii, towards the top of this list are Las Vegas ($1.8B), Dallas ($1.1B), Chicago ($1.1B), Atlanta ($1.0B) and Houston ($1.0B).

On a year-over-year basis, retail buyer composition has changed. In the second quarter 2008, private investors accounted for 58.0 percent of transactions. By comparison, for the second quarter 2009, the same group comprised 79.0 percent of the market. Equity funds and international investors were also less represented. Meanwhile, user financing gained in prominence-from 3.0 percent in 2008 to 6.0 percent in 2009.

The first half of the year proved to be a difficult environment for all commercial real estate, including retail properties. With fundamentals negatively impacted by a sharp contraction in demand, the volume of available retail space has been rising. Meanwhile, the growing number of distressed properties pushed prices lower. For the time being, it appears that credit availability continues to hamper significant deals, and the few buyers with available cash are waiting for even better deals.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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