Slow steady improvement appears to be the trend for this market as described below.


According to CoStar's recently released Third Quarter 2009 National Retail Report, quarterly retail leasing activity has improved for two consecutive quarters, with 24.3mil. SF in the third quarter building improving on the 23.6 mil. SF of retail leasing activity in the second quarter and 23.1 mil. SF of retail leasing activity in the first quarter.

The steady leasing activity seen this past quarter was enough to slightly offset the number of stores that closed or opted not to renew leases this year. Year-to-date net absorption was a positive 4 million square feet at the close of third quarter, a significant improvement from the negative 11 million square feet of year-to-date absorption at the close of second quarter.


Many industry observers have assumed that overbuilding has been a key driver of the retail real estate industry’s issues in this recession, but this has not been the case.

On average, the retail sector has added about 1.4% [% square footage of total existing retail space] to its inventory each year since the '50s, with the exceptions having been cycles of excess development during 1969 to 1975, 1977 to 1980, 1984 to 1991, and 1999 to 2002. In addition, the current level of retail property under construction in every market across the country, except Washington D.C., is below this 1.4% historical average as well.

The retail market has not been overbuilt in this most recent cycle. Forecasts will be about only a 0.8% increase in retail inventory during 2009, which would be the lowest (amount of new space built) ever, so new deliveries are not a part of the problem this time around.


The overall third quarter national average retail vacancy rate for the third quarter was 7.6%, up slightly over last quarter and up from a low of 6% at the end of 2007. Despite the relatively modest 7.6% vacancy rate, there is a large gap that currently exists between vacancy and retail space availability. Two years ago, the availability rate was about 75 basis points higher than the vacancy rate. Since that time, the gap has widened to 220 basis points, with the third quarter availability rate coming in at 9.8%.

Vacancy at the nation’s shopping centers is much higher, which is where dark space is much more visible to the general public. Specifically, general freestanding retail buildings have a low vacancy of 5.5% and vacancy by shopping center type generally increases as centers get smaller. Within the shopping center category, strip (11.8%), neighborhood (10.4%) and community (10.3%) centers have the highest vacancy rates, followed by lifestyle centers (8.4%), power centers (8%), regional malls (7.9%), outlet centers (5.7%) and super regional malls (3.8%). The only category showing an improvement in vacancy over the previous quarter was outlet centers.

Industry forecasts reflect that the national average retail vacancy rate will rise to higher than 8% in the first quarter of 2010 and following that, is expected to eventually return to pre-recession levels in early 2012.


At the end of third quarter, the national average retail rental rate (based on quoted asking rental rates, triple net) closed at $16.94 per square foot. While retail rental rates have been on a decline since second quarter 2008, but to put this in perspective, inflation-adjusted basis or “real rents” are still up about 3% from 2006 levels.

The industry forecast is that meaningful retail rental rate growth is not expected to return until 2011. While we may see some improvement in the face retail rental rate over the next few quarters, inflation-adjusted rents would likely continue to show negative year-over-year change until mid-2011.

Just as the decline in rental rates lagged negative absorption and increased vacancy, which has had downward pressure on retail property net operating income, any improvement in NOI would follow after rental rate gains return; expected in 2012.


The retail property sales market has been hit much harder than the leasing market. The national average retail cap rate hit a low of 6.1% in mid-2006 and since, it has risen to reach 7.8%, which hasn't been seen since early 2004. Ultra-low 2006 cap rates weren't sustainable because buyers were no longer willing to accept just-above Treasury rates of return for a commercial real estate asset. However, today's average retail cap rate of 7.8% is still below the historical average of 8.2%, and industry forecasts are for the average rate to eventually return to the 10% caps that were the norm in the mid-'90s.


Given investors appetite for risk, retail property sale prices are down significantly. As long as cap rates are rising, sale prices will have to go down until net income improves significantly. On an inflation-adjusted basis, the average price per square foot a shopping center sold for increased relatively steadily from 1995 until hitting a high of about $230 per square foot in 2008, which represented a generous 9% return per year on a compounded annualized basis. Since that high, the average price has dropped significantly, although there have been few transactions in the shopping center market to make a definitive assessment.

The pricing change amongst general freestanding retail buildings sold has been less dramatic, showing that on an inflation adjusted basis, the average price such properties sold for increased at an annualized rate of return of about 7.75% since 1995, hitting a high of about $275 per square foot at the end of 2007. However, since then that figure has declined to about $180 per square foot.

Looking at the country's 20 largest retail markets, only two -- Westchester/So. Connecticut and Washington D.C. -- have seen an increase in the average retail sale price per square foot over the last year. The markets that have seen the biggest drop during this time are South Florida (-49%), Detroit (-39.8%), Inland Empire (-39.5%), Boston (-36.9%) and Chicago (-34.5%). In general, the larger markets appear to be getting hit less hard than the rest of the country in terms of price declines.


During 2007, CoStar recorded between 2,000 and 2,100 retail property transactions each quarter. Since, that rate of transactions has dropped by about half, with barely more than 1,000 transactions recorded in the latest quarter. Looking at total retail square footage sold, the drop in activity is more drastic -- down about 74% from its peak. On a dollar volume basis, the number is sobering -- down 79% from the highs.

With the lack of available credit in the marketplace and the halt of CMBS activity, the bigger deals -- typically institutional Class A shopping center sales -- have been hit the hardest. Transaction activity involving sales of $5 million or less have held up a little better. Looking at the number of transactions, during 2007, there were between 1,700 and 1,800 general retail building transactions per quarter -- in the latest quarter, activity was down to about 950 transactions. Comparatively, activity is down by about 83% on transactions of $20 million or higher.

Looking at retail sales transaction activity so far in 2009 across the nation's 20 largest markets, most markets have seen between a 40% and 75% decline in sales activity over the same period in 2008. Among these, Tampa, Dallas, South Florida, Westchester, and Houston have seen the biggest drop offs in activity. On a transaction volume basis for the 20 largest markets so far in 2009, Los Angeles, Chicago, Atlanta, Long Island and Northern New Jersey are at the top -- all recording transaction volumes between $638 million and $863 million during this period.

In a new statistical analysis backing up the drop off in sales $20 million or larger, the average price of an average retail sale dating back to 1995 was tracked. The historical average was $1.9 million, a peak of about $3.5 million was hit in late 2005, hovered around $3 million in late 2007 and since has dropped to the current average of about $1.5 million.


The average time a retail property spends on the market for sale continues to hamper pricing and volume. More and more properties are being withdrawn from the market, showing that in the latest quarter, owners pulled about $9.5 billion in retail sale listings off the market, which compares to a pre-recession norm of about $6.5 billion pulled off the market quarterly.

For those properties that are not pulled off the market, the direct correlation between the sale price/asking price ratio declining the longer a retail property spends on the market. Since 2006, the average days a retail property spends on the market for sale has increased from about 200 days (6.7 months) to 280 days (9.3 months) and during that time the sale price/asking price ratio has declined from about 91% to 85%.


Are you being taxed on Business Value?

Many real estate assessments today include the business value of operating properties along with real estate value. The result is that property owners may be paying real estate taxes on more than just the value of their real estate alone. Hotels, motels, office buildings, and apartment properties are all operating entities with personal property, management, trade names, goodwill and other intangibles adding to overall property value. For the most part, assessors have been unable or unwilling to exclude these value components from real estate tax assessments.

If you suspect that your real estate is being overtaxed, contact us at or call 215-855-1800 today for more information.