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News release

Chicago, IL.

Retail Sector Recovery Continues Positive Momentum

Firm’s Spring North America Retail Outlook reveals increased capital markets and leasing activity despite continued uncertainty in employment, housing, and global climate

CHICAGO, April 19, 2011 — As economic fundamentals continue to improve and consumer confidence rebounds to near pre-recession levels, the national retail market is poised for recovery in the next 18 to 24 months, according to Jones Lang LaSalle’s North America Spring Retail Outlook.  With consumer purchases moving close to pre-recessionary levels as a result of a strong holiday shopping season, shoppers are releasing pent-up demand, creating an ideal environment for retailers, landlords, and investors to capitalize on strategic opportunities, despite subdued employment and a challenging housing market. 
Retail outlook highlights

• National retail vacancy levels dropped slightly from last quarter’s level of 7.3 percent to 7.2 percent. Open-air shopping centers reported in at 10.8 percent at the high end and general retail at 5 percent at the low end of the spectrum.

•  Investment sales volume of significant retail properties totaled $22.6 billion for 2010, up 51 percent from 2009’s cyclical low of $15 billion and only slightly lower than 2008’s level of $24.0 billion. Sales volume from the fourth quarter of 2010 was an impressive $8.3 billion, 29 percent higher than the previous quarter’s total and more than twice the value of the quarterly levels during the first half of the year.

• Rents are still declining with a year-over-year drop of 4 percent, averaging $14.94 psf at year end.

• Among the markets tracked, New York (1.9%), San Francisco (3.1%) and Miami-Dade (4.7%) continue to be the healthiest retail markets. 

“The retail sector has weathered the storm and is now slowly moving into recovery,” said Greg Maloney, CEO and President, Jones Lang LaSalle Retail.  “We expect 2011 to be stronger than last year even with uncertainty in unemployment, gas prices and housing.  Development has been at historic lows which has helped the recovery gain momentum and we expect to be in a healthy environment in 24 months.”
A re-balancing market

The creative strategies employed by retailers and landlords alike over the last 12 to 18 months is finally paying off, as the market saw a positive net absorption of approximately 50 million square feet in 2010, reducing U.S. retail vacancy year over year by 20 basis points. In the fourth quarter, nearly 21.5 million square feet of retail space nationwide was absorbed, compared to a negative 500,000 square feet during the first quarter of 2010. The national market is beginning to see stabilization as excess vacant space is absorbed and development remains low at only 32 million square feet of deliveries last year.

National retail vacancy levels dropped slightly from last quarter’s level of 7.3 percent to 7.2 percent. Open-air shopping centers reported in at 10.8 percent at the high end and general retail at 5.0 percent at the low end of the spectrum. Rents are still declining with a year-over-year drop of 4 percent, averaging $14.94 in the fourth quarter.

Among the markets tracked, Houston and Washington D.C. reported the most positive absorption in 2010 with 3.9 million square feet and 3.2 million square feet, respectively. On the other hand, Broward County in South Florida had a negative net absorption in the fourth quarter of -229,068 square feet and a total net absorption for the entire year of only 137,129 square feet.

Retail store openings will pick up slightly in 2011, with retailers planning to open more than 66,000 stores in the next two years.
Emerging trends in the retail landscape

The future of retail will be most profoundly impacted by the spending habits of the consumer. One continuing pattern is the widening income gap as wealthy consumers benefit from increasing bonuses and growing salaries, while lower-to-middle-income shoppers see their spending power diminished by rising gas prices, a significant portion of their discretionary income. Retailers will also feel the impact of the oil crisis on both lowered sales and increased transportation costs.

Consumers also continue to migrate at least some of their shopping to the internet, leaving retailers to create strategies to accommodate this, including smaller floor plates and more nimble logistics and warehousing programs. 

A tale of two cities is brewing between consumer categories as the luxury category sector ramps up with Neiman Marcus and Saks Fifth Avenue reporting sales increases of 10 to 15 percent. Wal-Mart is reporting flat sales, though its new smaller-store format may produce an upswing in coming months. The mega retailer also plans to test 40 of these 14,000-square-foot prototypes in urban and select rural locations this year, as well as a number of 40,000-square-foot locations. Discounters such as dollar stores will continue to see solid revenues, but not at the pace as seen in the last 12 to 18 months.

Within the investment sales arena, a steady flow of grocery-anchored trophy properties is beginning to enter the market, filling up the pent-up demand for quality core product, particularly from retail REITs and pension funds seeking healthy returns on their ample cash reserves. Private investors including venture capital funds and foreign investors are also hungry for both trophy properties and distressed assets. 

With landlords’ increasing willingness to negotiate deal terms to fill vacancies, grocery stores are heading back to the malls in a win-win proposition for landlords, tenants, and consumers seeking convenient one-stop shopping. 

“Lower rental rates and better lease terms now available at malls in most markets are getting attention from non-traditional retailers such as groceries and big boxes,” said Lew Kornberg, Managing Director, Corporate Retail Solutions. “This strategy not only fulfills the consumer’s need for convenience, affordable prices, and specialty products, but boosts retail traffic for all other adjoining retail mall tenants as well as revenue for landlords.”
Technology’s impact on the retail experience

With the increasing adoption of smartphones and apps, shopping methods are no longer discrete but rather interactive and interdependent. This creates both a challenge and an opportunity.  According to Coremetrics, a division of IBM, consumers using mobile devices accounted for 0.1 percent of visits to retail websites on Black Friday in 2009, compared to 5.6 percent in 2010.

“Shoppers using mobile phones to compare prices in-store pose a risk for retailers who do not have competitive pricing or a standout store experience,” said Kornberg. “The long-term implications of increasing adoption of price comparison apps could mean a shift to online retailers that sell at discounted prices, or physical retailers who are able to either price inventory competitively or compete effectively on other equally important criteria.

Additionally, thanks to the location-based capabilities of smartphones, retailers will need to think locally. Even traditional, large-scale department stores are tailoring their merchandise to individual stores, based on demographics. App adoption will increase in terms of the number of people who use them and the number each parson has. The global mobile app market, currently worth $6.8 billion, is expected to be worth $25 billion by 2015, according to a study by MarketsandMarkets, they will become the primary device used by consumers.
Investment sales volume jumps by 29 percent in the fourth quarter

Investment sales volume of significant retail properties totalled $22.6 billion for 2010, up 51 percent from 2009’s cyclical low of $15 billion and only slightly lower than 2008’s level of $24.0 billion. Sales volume from the fourth quarter of 2010 was an impressive $8.3 billion, 29 percent higher than the previous quarter’s total and more than twice the value of the quarterly levels during the first half of the year.  

The average price of these retail assets increased in the fourth quarter, to $168 per square foot. Retail property cap rates have declined approximately 50 basis points from their peak in the first quarter of 2010 to 7.7 percent.  All subtype cap rates saw a drop in cap rates, with strip centers cap rate falling by 44 basis points to 8.2 percent, and malls and other retail properties falling by 37 basis points to 7.4 percent.

Distressed assets represented just under 10 percent of all retail sales in 2010, with a total retail workout volume of $26.5 billion for the year. At the end of 2010, there still remained $25.5 billion in unresolved distress. New inflows to distress since the start of the year totalled $13.3 billion.

“In the retail sector, it’s critical to remember that lenders favor loan modifications or extensions over foreclosures,” said Kris Cooper, Managing Director, Jones Lang LaSalle. “Nearly 90 percent of the total retail workouts for the year were resolved through these types of modifications or extensions.  However, in the past 30-60 days, we’ve seen substantial improvements in the overall debt markets which will ultimately mean significantly increased trades in the months to come.”

“In particular, lenders are once again beginning to provide financing for Class B+ properties, which will move the needle in the investment sales sector significantly after many months of low levels of debt availability,” added Margaret Caldwell, Managing Director, Jones Lang LaSalle.  “In fact, the recent sale of Kirkwood Mall in Bismarck, North Dakota, is proof that the capital markets are opening up for Class B assets.”

Cooper added, “There is so much pent up demand that core assets will do extremely well in today’s climate.”

Not all regions are experiencing the same levels of investment sales activity.  The West region led retail property sales in 2010, with $5.74 billion.  The Southeast was second with $5.28 billion in transactions, followed by the Southwest ($3.2b), the Midwest ($2.75b), and Mid-Atlantic ($2.34b).
2011 Outlook

The health of employment and housing, in particular, will prove to be critical to the leasing environment in 2011. Employment’s only modest gains over the last several months, averaging 83,000 jobs per month, are not enough to boost consumer confidence to the levels needed, especially in light of rising gas prices.  Home sales, while improving, are also running at previous-recession lows, remaining one of the weakest components of the economy and posing the largest obstacle to a sustained recovery and healthy retail climate.

Since retail vacancy has topped out in 2010, we should begin to see a gradual absorption of the existing inventory through mid-2012. Retailers with cash reserves will most likely step up expansion plans this year, while store closings are predicted to return to 2005 levels of approximately 4,300.   

As for the investment sales landscape, the type of product that investors will seek in 2011 will continue to be dominant, supermarket anchored assets, as well as those with long-term leases and those that are located in core, major markets.  Still sitting on the sidelines will be assets located in tertiary markets, lifestyle centers and power centers with flat returns.  However, investors will continue to move farther up the risk continuum in their quest for stable, secure locations in which to park their cash.

About Jones Lang LaSalle

Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2010 global revenue of more than $2.9 billion, Jones Lang LaSalle serves clients in 60 countries from more than 1,000 locations worldwide, including 185 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.8 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $41 billion of assets under management. For further information, please visit our website,