Retail properties poised to rebound as economy strengthens according to Marcus & Millichap report

In spite of short-term fears including unrest in the Middle East, a spike in commodities prices and concerns over the nation's growing budget deficit, the U.S. economy continues to strengthen. Corporate balance sheets have improved significantly, consumer confidence is building and retail sales improved markedly during the 2010 holiday season. These positive factors bode well for the U.S. retail real estate sector, which recently reached bottom, according to the National Research Report (NRR) released recently by Marcus & Millichap Real Estate Investment Services. "The drop-off in store closures, the virtual standstill of new spec construction and expansion by stronger tenants were welcome developments last year," said Hessam Nadji, managing director, research and advisory services for Marcus & Millichap. "In addition, core retail sales in the U.S. exceeded their 2007 peak levels several months ago which set the stage for occupancy improvements nationwide, especially in primary markets. However, the improvement in the retail real estate market will be very bifurcated, with newer developments in outlying areas showing much higher vacancy rates than in-fill, established markets. "The retail landscape is also changing," he said. "An explosion in online sales has rekindled worries among property owners about the future of certain types of brick-and-mortar retail," said Nadji. "The retail property sector consistently reinvents itself, and we expect the industry to continually launch innovative new concepts to draw traffic. Fortress malls in superior locations, for instance, are thriving, having shifted tenant mix surprisingly fast and collaborated with distressed merchants to preserve occupancy." Included in the report is the National Retail Index (NRI), a snapshot analysis that ranks 44 major retail markets based upon a series of variables, including forecast employment growth, vacancy, construction, household formation, retail sales and rents. Better-than-average employment growth forecasts, elevated income levels and, in most cases, low vacancy rates characterize the top markets in the NRI. Washington, D.C., retained the #1 spot, while New York City moved up two places to #2. San Diego (#3) edged down one position, and both Los Angeles (#4) and Orange County (#5) climbed two spots. While properties in coastal markets with high barriers to entry continue to improve, so does the retail lending climate. Last year's marked improvement in capital markets will extend into 2011, with more financing available for a broader range of assets. "Today, financing is far more available across all type of retail properties and markets, but lenders still have a clear preference for low risk, high quality assets. The lower end of the market will continue to struggle in finding buyers and lenders but the environment is definitely improving," said William Hughes, senior vice president and managing director of Marcus & Millichap Capital Corporation. "Cautious lenders will keep loan-to-values near 60% for all but the best-in-class properties, a far cry from the market peak. Proximity to jobs, strength and diversity of rent roll will point most lenders to infill, quality properties. As opportunistic buyers seek higher B and B- cap rates without excessive risk, however, buyers and lenders will increasingly move down the value chain to finance such assets. Lingering weakness in housing, commercial bank earnings and global debt concerns will remain front and center in 2011. As fundamentals regained their footing last year, investors returned in earnest, but remained selective and risk-averse as the economy emerged from the deep recession, the report states. "Institutional capital sent sales volumes soaring off extreme lows," said Alan Pontius, managing director of the firm's National Retail Group (NRG). "This influx created intense buyer competition and cap rate recompression for best-in-class assets. Retail REITs' extraordinary recovery, at nearly three times that of the S&P 500, clearly illustrates this trend. Along with top-tier multi-tenant assets, highly rated single-tenant properties captured demand from cash-flow-oriented private investors. The balance will shift to include more diversity in asset quality and markets in 2011 as improved economic performance and stronger consumption top the list of factors encouraging investors to move beyond top-tier assets," Pontius said. "The biggest risk to the capital markets' improvement," Pontius said, "is a reversal of macro-level confidence, which is being impacted right now by the ongoing revolts in the Middle East and rapidly increasing commodities prices." With more than 1,200 investment professionals in offices nationwide, Marcus & Millichap Real Estate Investment Services is one of the largest firms specializing in commercial real estate investment services in the nation. Marcus & Millichap closed 4,302 transactions in 2010, the highest of any commercial real estate brokerage firm. Founded in 1971, the firm has perfected a powerful system for marketing properties that combines product specialization, local market expertise, the industry's most comprehensive research, state-of-the-art technology and relationships with the largest pool of qualified investors nationally.