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News release


Retail Sector Recovery Slow and Arduous as Fundamentals Improve Gradually, Reports to Jones Lang LaSalle

Firm’s Fall North America Retail Outlook finds landlords adopt creative ways to absorb space while investors remain frustrated at inventory

CHICAGO, Nov. 11, 2010 — The rise and fall of consumer confidence is parallel with the retail sector’s recovery according to Jones Lang LaSalle’s inaugural North America Fall Retail Outlook.  While consumer confidence is higher than it was during the heart of the recession, consumers are still waiting for improvements in core fundamentals such as employment and household deleveraging before they truly become optimistic and begin spending again.  Until the core fundamentals improve, the retail property market will remain a buyers’ market for tenants, consumers, as well as for investors, if they can find product. 
Retail outlook highlights
  • National retail vacancy levels stand at a healthy 7.3 percent with open-air shopping centers at 10.8 percent vacant at the high end and general retail at 5.1 percent vacant at the low end of the spectrum.
  • Investment sales volume for the first half of 2010 is 43 percent higher than the market trough in the first half of 2009.

  • Rents are still declining with a year-over-year drop of 4.3 percent, averaging $15.18 in the third quarter.

  • Among the markets tracked, the West Coast including Los Angeles and San Francisco remain the healthiest with 5.1 percent and 3.2 percent vacancies, respectively.
“Although consumer confidence remains tepid at best, the industry is starting to make a gradual incline toward recovery,” said Greg Maloney, CEO and President, Jones Lang LaSalle Retail.  “Development is at an absolute standstill and this helps aid in the recovery process.  We expect 2011 to be better than the last few years but nowhere near the peak of 2006.” 

Leasing shifts into first gear – creativity is critical
Excess inventory is one of the biggest obstacles toward a stabilization of the retail leasing market as landlords move quickly to find ways to absorb the excess vacant space.  In the third quarter, nearly 32 million square feet of retail space nationwide was absorbed.  This compared to a negative 500,000 square feet during the first quarter.  While overall vacancy rates for all retail remained flat at 7.5 percent year over year, rents decreased by $1.00 from $16.81 per square foot to $15.81 per square foot on average.

Among the markets tracked, Houston and Washington D.C. reported the most positive absorption in the second quarter with more than three million square feet and more than 1.8 million square feet, respectively.  Atlanta and Chicago, on the other hand, had negative net absorption of -407,984 square feet and -312,935 square feet, respectively.  San Francisco remained flat with just under 100,000 square feet absorbed during Q2.

Pop-up stores, temporary leasing and incubator tenants are just a few of the creative ways that landlords are filling vacant space to generate cash flow.  Retailers such as Gap, Target and Gucci are using pop-up stores – retail locations leased for a few days or weeks – to introduce new lines, boost sales and generate buzz.  Pop-up restaurants are another new trend as restaurant operators take advantage of under-utilized kitchens in areas such as Philadelphia and San Francisco.  Benefits include a very low cost of entry and the ability to test new concepts. 

Additionally, the sector has seen an increase of temporary seasonal stores with more leases signed in the past 12 months than in the last five years.  National retailers opening temporary, seasonal stores include Toys ‘R Us, Build-a-Bear, Chico’s and Game Stop (MovieStop).  Jones Lang LaSalle predicts that a small percentage of national temporary stores will become permanent tenants. Landlords continue to take creative approaches by filling empty spaces with non-traditional tenants such as non-profits, municipalities and colleges and universities to fill empty spaces. 

National retailers such as Sears, Meijer and Wal-Mart are also testing drive-through lanes in response to consumers’ demands for convenience.  In a recent Pew Research study, 32 percent of shoppers ranked in-store pickup as valuable, up from 22 percent in 2008.  Other responses to consumer demand for greater convenience include Target, CVS and Wal-Mart beefing up their grocery sections as the consumer landscape has evolved to one of convenience.  This phenomenon could explain why Wal-Mart is testing smaller concept stores within urban markets and why convenience stores are amping up their fresh food offerings.

“As the economy recovers, grocers like Kroger and Whole Foods are reporting impressive same store sales and profit improvement.  Both companies reacted to both the downturn and increased pressure by Wal-Mart, Walgreens and others by working harder to provide a better customer experience and better pricing which resulted in increased market share,” said Joe Brady, Managing Director, Corporate Retail Solutions. 

It’s not only national retailers that are showing more activity. According to Jones Lang LaSalle’s Director of Retail Leasing and Development John Bemis, “Local and regional retailers are growing at a faster clip due to the recession.  Many former business executives that have lost their jobs are channeling their entrepreneurial spirit into new retail concepts.  Landlords encourage incubator tenants that have necessary preconditions such as a unique concept filling a void in the marketplace, availability of personal savings and a target market that corresponds with the centers existing demographic.”

Frugal fashion and luxury retailers remain steadfast tenants at all retail types.  However, cheap-chic stores such as H&M are opening more stores in urban locations versus malls in order to cater to time-strapped consumers, while luxury retailers like Bloomingdales and Nordstrom are turning to outlet stores to sell to a wider audience at a discounted rate while not hurting their image.  Additionally, retailers are joining forces to share space and draw shoppers.  Mangos and Aldo will open stores within J.C. Penney stores, while Forever 21 and Edwin Watts, a golf shop, are opening inside Sears stores nationwide. 

Investment sales volume up but little product to be had

After two years of dismal U.S. retail property transactions, sales of significant retail properties increased more than 43 percent to $6.1 billion during the first half of 2010, and through August of this year sales had increased to $10.5 billion. Moreover, the average price of these retail assets increased as the number of properties sold during the first half of 2010 is down 15 percent from the same period last year.  Retail property cap rates vary widely from below 7 percent for the highest quality retail asset to over 10 percent for distressed properties, while the average closed cap rates are approximately 8 percent and declining.  However, exceptional assets such as top-quality strip centers have seen cap rates dip as low as 6.5 percent.

A continued theme across buyer groups for the retail property market is frustration at the lack of product.  In addition to a gap in expected pricing and values, The misalignment of what properties buyers want versus what sellers are prepared – or compelled – to sell, continues to push sales volume downward.  While industry experts predicted the gap between seller and buyer expectations would shrink in 2010 that has not been the case so far as banks are more willing to hold assets rather than sell at drastically reduced prices. 

“Banks have learned from previous recessions that the market does come back and they are not willing to drastically reduce pricing,” said Kris Cooper, Managing Director, Jones Lang LaSalle.  “After conducting fire sales during the last downturn, they saw investors make huge profits not long after the recession ended. They won’t make that mistake again.” 

Cooper continued, “Prospective retail property investors are typically divided between two groups:  core and opportunistic.  Competition is fierce among core buyers who are looking for quality assets in the markets. Opportunistic buyers, on the other hand, have continued to be frustrated by the dearth of distressed assets on the market; however, we see that changing as we start 2011 with substantially more retail product expected to come to market.”

Distressed assets are averaging about 10 percent of all retail sales year to date.  The average size of a distressed asset is similar to the size of a non-distressed asset; however, there is a great difference in pricing with non-distressed properties trading at an average of $145 per square foot and distressed properties trading at $104 per square foot.  Retail assets falling in distress since the start of the year totalled nearly $26.5 billion in August. 

Not all regions are experiencing the same levels of investment sales activity.  The Southeast region leads retail property sales for the first eight months of the year, with $2.88 billion.  The West was second with $2.77 billion in transactions, followed by the Midwest ($1.53b), Southwest ($1.14b), and Mid-Atlantic ($1.07b).

What to expect in 2011

While 2010 will be remembered as a year of slow and arduous recovery, 2011 is looking somewhat brighter.  Jones Lang LaSalle expects that retail capital markets in 2011 will be extremely busy as substantially more retail product enters the sale market which will be a combination of distressed and core as pent up demand takes over globally.  Retailers will continue to grow at a slow pace but will focus more on optimizing their current portfolios to maximize savings.  Landlords will continue to reinvent themselves to remain relevant to shoppers and will be happier in 2011 as rents begin to increase ever so slightly.

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 2009 global revenue of $2.5 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.6 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 approximately $40 billion of assets under management. For further information, please visit our website,