34A — March 30 - April 12, 2012 — Shopping Centers — Mid Atlantic Real Estate Journal
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R ETAIL E XPERTS
Marcus & Millichap 2012 Annual Retail Market Forecast
he Philadelphia retail market will make steady improvements in 2012 as retailers lease spaces vacated during the recession and rents tick up modestly. Tenant demand has made significant headway, with more than 2.4 million s/f of space occupied since vacancy peaked in early 2010. Retailers moving into locations in the metro’s many desirable trade areas will gener- ate an additional 1.4 million s/f of net absorption during 2012. Still, a more vigorous rate of new store openings will be required to reduce vacancy to its level at the start of the recession, and many national retailers will likely delay broader expan- sions until payrolls are more aligned with pre-re- cession levels. Rents, meanwhile, rose modestly last year, and should accelerate in 2012 as addi- tional properties approach full occupancy. The metro is sustaining intense interest in single-tenant assets net leased to national credit tenants. New drugstores remain a coveted target, but at the end of last year, only 13 stores were in the construction pipeline; as few as five may be built this year. Newly leased properties occupied by the top national drugstores typically command cap rates in the mid to high-6-percent range, with more seasoned leases trading for approximately 100 basis points more. In the multi-tenant seg- ment, large investors are pursuing shopping centers anchored by dominant grocery chains. Although velocity is slow, cap rates in this seg- ment are estimated as low as the mid-6-percent range. Below the market’s top-tier assets, consid- erable appetite exists for value-add opportunities, though buyers’ and sellers’ expectations remain misaligned. 2012 Market Outlook · 2012 NRI Rank: 12, No Change. Limited payroll growth merged with minimal concessions to keep Philadelphia in the 12th position of the index. · Employment Forecast: Total employment in the metro will expand 0.9 percent in 2012 through the addition of 23,500 jobs. In 2011, 10,000 posi- tions were created. · Construction Forecast: Developers will complete 1 million s/f of space in 2012, an increase from 646,000 s/f last year. Key completions include two Walmarts and a portion of the 425,000 s/f Vil- lage at Valley Forge, which includes the metro’s sixth Wegmans. · Vacancy Forecast: Metrowide vacancy will decline 30 basis points this year to 8.3 percent, erasing the 10-basis-point increase in 2011. · Rent Forecast: During 2012, asking rents will advance 1 percent to $19.57 per s/f and effective rents will increase 1.3 percent to $17.33 per s/f. · Investment Forecast: Fueled by attractive financing rates, more buyers will enter the pool of single-tenant, net-leased property investors, plac- ing additional downward pressure on cap rates. Properties with seasoned leases will emerge as a primary target. ■ T Philadelphia, PA
Washington, DC
New Jersey
obust job gains in the professional and business services and education and health services industries will encourage national retailers to expand in New Jersey, though a lack of financing could slow the recovery. These employ- ment sectors, which account for 30 percent of pay- rolls, will gain 25,000 jobs this year. Abulk of these positions will land in Bergen, Middlesex, Morris, and Camden counties. Enticed by the favorable demographics and job growth, national chains, in- cluding Burlington Coat Factory, BottomDollar and Big Lots, will lease vacated anchor space in these areas, helping improve statewide vacancy 40 basis points this year. Nonetheless, banks will remain hesitant to distribute SBA loans to local merchants looking to expand in the state until market condi- tions further strengthen. As local retailers struggle to open stores, owners will have trouble backfilling smaller in-line spaces, delaying more significant vacancy reductions until 2013. Owners seeking less-management-intensive properties will sell sought after multi-tenant as- sets, attracting private buyers willing to take on higher perceived risk. Low interest rates and pent-up investor demand for performing shopping centers will keep cap rates compressed this year. As such, owners looking to exit the market in the near term will increasingly consider dispositions in the next 12 months before the cost of capital rises. Cash-heavy investors who want to diversify their portfolios outside of the equities markets will target these anchored shopping centers occupied by national chains. Improving operations will allow these opportunistic buyers to underwrite modest rent growth over the next five years to enhance revenues. Grocery-anchored centers in supply- constrained areas of Northern New Jersey will produce yields near 7 percent, while in Central and Southern Jersey, buyers can capture returns in the mid to high 7-percent range. 2012 Market Outlook · 2012 NRI Rank: 15, Down 4 Places. Ongoing government cuts pulled New Jersey down four spots in the index. · Employment Forecast: Employers will cre- ate the most jobs since 2006, expanding payrolls by 46,000 positions this year, an increase of 1.2 percent. · Construction Forecast: In 2012, construction will fall to a record low as developers complete just 440,000 s/f, expanding stock 0.2 percent. · Vacancy Forecast: National retailer expan- sions and limited supply will underpin a 40-basis- point decrease in vacancy to 7.6 percent in 2012. · Rent Forecast: Owners will lift asking rents 0.4 percent this year to $23.05 per s/f. Effective rents will rise 0.9 percent to $20.31 per s/f. · Investment Forecast: Risk-averse buyers looking for bond-like investments will target single-tenant assets net leased to a top-rated ten- ant. Buildings secured by a retailer with a triple A/B+ credit rating will command returns in the mid- to high-6-percent range. ■ R
acancy will tighten to the mid-5-percent range in the Washington, D.C., metro this year, supporting the first annual rent increase in four years. However, further improve- ments in the local job and housing markets will hearten retailers and developers, leading to more significant completions after 2012. Expected de- liveries in 2012 are slight, but significant develop- ments under consideration include a mixed-use project in the White Flint section of Rockville in Montgomery County and the CityMarket at O in the district. Walmart has also increased its pipe- line to six stores in the district, and several grocers are contemplating new stores in under-served neighborhoods. Clearly, minimal completions will help reduce vacancy in 2012, but newmulti-tenant development may limit future declines without a stronger job and housing market recovery. In the metro, cap rates for top-rated drugstore chains with full lease terms start in the low-6- percent range, while bank branches can trade somewhat lower. It remains unclear whether cap rates will dip even lower during 2012, especially as investors become more comfortable purchasing properties with shorter leases. In the multi-ten- ant segment, institutional-grade shopping centers in core trade areas can sell at cap rates below 6 percent, but the market for Class B/C assets continues to struggle to gain traction. Investors remain focused on future rents, with those Class B/C properties most likely to see near-term rent growth commanding cap rates around 8 percent. Meanwhile, mixed-use assets at high-traffic lo- cations inside the beltway trade near 7 percent. Properties with dimmer prospects of near-term rent increases, however, require double-digit cap rates to clear the market. 2012 Market Outlook · 2012 NRI Rank: 7, Down 6 Places. Washing- ton, DC, surrendered six positions in the ranking as government gridlock hampers job growth. · Employment Forecast: The metro will gain 44,000 jobs during 2012, a sizable increase from the 18,000 positions added last year. · Construction Forecast: In 2012, developers will complete 1.1 million s/f of retail space, mark- ing a slight decrease from about 1.4 million s/f delivered in 2011. · Vacancy Forecast: Retailers will occupy an additional 1.6 million s/f of space in 2012, slic- ing vacancy 30 basis points to 5.6 percent. In 2011, limited construction and a modest rate of expansion by retailers reduced vacancy 10 basis points. · Rent Forecast: This year, asking rents will advance 1.3 percent to $26.06 per s/f. Effective rents will rise 2 percent to $23.01 per s/f. · Investment Forecast: Greater availability of debt and unfulfilled investor demand will fuel additional deals for Class B/C shopping centers in areas of the metro with the best demographic profiles. ■ V
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