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News release

CHICAGO, IL

Positive Retail Trends Mixed with Uncertain Fiscal Policies Signify a Cautious Start to 2013, According to Jones Lang LaSalle

Lack of development coupled with improving consumer confidence may lead to higher NOI rents and occupancies if fiscal cliff is averted


CHICAGO, Dec. 3, 2012 — Relatively stable pricing and pent-up demand for non-durable goods will drive up consumer spending slightly in 2013, but retail real estate performance is unlikely to see dramatic improvements until employment growth accelerates, according to Jones Lang LaSalle’s 2013 National Retail Real Estate Outlook. Experts from the firm detail these and other findings in the report, published today.

“2013 will be a year to separate the wheat from the chaff,” said Greg Maloney, Jones Lang LaSalle’s Americas Retail President and CEO. “Property subtypes, markets and retailers that are doing well now will continue to strengthen their position, while those that are weak and struggling will stumble along or fail entirely.”

As 2013 approaches, several sources of uncertainty that have hindered retail sales will be alleviated, while others continue to weigh on business and consumer confidence. The November election is over, and Jones Lang LaSalle’s forecast assumes that lawmakers will act to avert a fiscal and economic collapse, even if only by means of a temporary compromise. Lingering risks to retail sales in 2013 include a potential spike in energy prices, natural disasters, geopolitical instability abroad and structural shifts in buying patterns and online purchasing.

Retail real estate fundamentals, too, are in a tug of war between positive and negative trends that will largely cancel each other out in 2013, leaving overall occupancy and rental rates to stagnate. Some retailers will expand aggressively, but there is a concurrent trend toward smaller store footprints. And as some chains vacate big box spaces or close altogether, off-price department stores and other retailers will seize upon those opportunities to backfill the space.

Consumers will be slightly better off in 2013 and are expected to increase retail spending moderately, barring economic shocks. Households continue to deleverage, core inflation remains low, and another unseasonably mild winter may reduce consumers’ energy costs and boost spending at restaurants and on staple goods like apparel and footwear through mid-year. Weather and disaster-related preparation and repairs may drive some spending, and sales of existing and new homes will increase in 2013, driving purchases of furniture and other goods.

“Household balance sheets are in a much better state than before the financial crisis, and wealth appreciation in the stock market has helped to boost confidence and supports some retail purchasing, especially as goods need to be replaced by necessity,” Maloney said. “Yet while other indicators are turning positive, sluggishness in the labor market will have a reverberating impact on the retail sector, keeping occupancy and rent growth rather muted.”

2013 Retail Real Estate Outlook Highlights

  • Store opening plans are at a four-year high. Retailers will open as many as 78,325 stores in the next two years – up 11 percent from year-end plans in 2011.
  • Non-durable purchases will outperform throughout 2013 with a marked improvement expected in the second half, reflecting stable core prices (excluding food and energy).
  • Construction will add 52 million square feet of space in 2013, more than double the 20 million square feet completed in 2012.
  • More retailers are opening stores-within-anchors: Target has added Apple displays and small shops; J.C. Penney operates mini-stores such as Mango and Sephora and plans hundreds of in-store shops; and Finish Line plans to open 450 stores inside Macy’s.
  • To better compete with online sellers, retailers including Wal-Mart are experimenting with same-day delivery in some markets.
Retailer Outlook

Trying times will reward retailers that embrace and expand the use of e-commerce and m-commerce (shopping on mobile devices), while punishing less competitive firms.

“Corporate retailers that are doing well will continue to acquire new locations in prime real estate in an opportunistic, but strategic fashion,” said Lew Kornberg, Jones Lang LaSalle’s Executive Vice President for Retail Tenant Solutions. “Real estate that is largely dependent on cash-strapped mom-and-pops and/or smaller, regional, players and lacking national credit retailers will continue to struggle, with the potential exception of grocery-anchored, community centers. The health of those grocery anchored centers is, however, closely tied to strength/appeal of the grocer.”

Exceptions will be in markets where population is booming, with Raleigh, Phoenix and Las Vegas experiencing the greatest percentage of rent growth. Miami, Washington DC, San Francisco, Tampa, Hawaii and Boston will continue to see year-over-year rent growth.

Planned store openings are at a four-year high with dollar stores and restaurant chains leading the pack, but the trend to smaller store footprints will partially cancel out net absorption. Dollar stores and restaurant chains are frontrunners in aggressive expansion.

The 52 million square feet of new retail space in the pipeline for 2013, and the move to smaller stores, renders a swath of aging properties obsolete by comparison. Look for demolition of some properties, and for conversion of others to churches, office buildings, transit centers, government and other uses.
Similarly, a dwindling anchor pool will compel landlords to seek alternative uses for vacant spaces, such as schools, clinics. Grocery-anchored retail centers with restaurants or other entertainment venues that drive traffic will outperform competing properties lacking in experience-oriented retail.

The shift to electronics has already hammered sales for office suppliers and book sellers. Look for a similar decline among video game retailers, as consumers increasingly switch to online games. GameStop recently announced it is closing 200 stores after posting a net loss of $624.3 million.

Investment Sales
Institutional buyers are buying up core properties, particularly grocery-anchored assets in major markets, but supply is limited. High-quality assets in secondary markets or non-core submarkets of major metros are fulfilling some of that investor demand.

“Strong, grocery-anchored centers will continue to be the stars in 2013, but the specific grocery tenant is critical,” said Margaret Caldwell, Jones Lang LaSalle’s Managing Director of Retail Capital Markets. “They must be the No. 1 or No. 2 grocer in terms of market share for the area, and generally more upscale chains will draw the most shopper attention.”

Single-tenant drugstores with leases of 10 to 20 years also hot sellers for stable income-oriented investors, while the mall real estate investment trusts (REITs) are actively seeking Class A malls with limited to no product which has led to cap rate compression and stronger demand for Class B malls.

According to Caldwell, the top markets for institutional transactions in 2013 are the primary financial and urban core cities, including Boston, New York, Miami, Dallas, Houston, Los Angeles and Washington, D.C. Improving demographics will drive transactions in Atlanta and Charlotte next year, while limited supply is driving buyers to Raleigh, Charleston, Orlando and Tampa. We are seeing more institutional properties on the market and demand for all retail property types continues to increase. “We have experienced this in our recent offerings where properties in secondary or tertiary markets are going to market and trading faster at higher prices,” Caldwell said.

For greater detail on Jones Lang LaSalle’s research forecasts, visit the firm’s research reports at: www.us.joneslanglasalle.com.

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 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 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 $47 billion of assets under management. For further information, please visit www.joneslanglasalle.com.