A common real estate maxim states that retail development follows new housing. These days, though, retail real estate may be following the home market off a cliff.
Sparked by the housing boom across the country, shopping-center and mall developers have gone on a tear in recent years, delivering millions of square feet of new space in Phoenix, San Antonio, Cleveland, Tampa, Fla., and numerous other markets.
Since 2005, developers in the U.S. have produced more retail space than office space, rental apartments, warehouse space or any other commercial real estate category.
But just as that new space is hitting the market, demand is declining. Mounting home foreclosures have sapped the strength of previously hot markets like Phoenix and California’s Inland Empire near Los Angeles, leaving retail-property owners with rising vacancies and slower leasing rates for new space. And anemic sales gains in the just-completed holiday season fell short even of the retail industry’s tepid preseason forecast.
More shopping centers are suffering defections such as those faced by Phoenix’s Paradise Valley Mall, which was built in 1979 and renovated in 1990.
Though the mall has a healthy roster of tenants, an anchor slot vacated by a predecessor of Macy’s Inc. has been vacant for two years. Among the empty storefronts in the otherwise vibrant venue: one left behind by bankrupt Bombay Co.
Analysts expect that more bankruptcies and liquidations of second-tier retailers are likely this year. Some retailers, such as Talbots Inc., are closing weak stores. Projected retail demand will justify only 43 percent of the new space delivered this year and last, predicts market-research firm Property & Portfolio Research Inc.
Retail development is “basically at a three-year high,” says Steven Marks, chief of research on real estate investment trusts at Fitch Ratings Inc. “And that three-year high is at a point in the economic cycle where it’s probably not the best time to be developing right now.”
If consumer spending falls off much more, the retail-property market faces a bloodbath, some say.
“In a recessionary scenario, retail gets killed, absolutely killed,” says Suzanne Mulvee, senior economist at Property & Portfolio Research.
If the market holds steady, current trends will still translate into varying degrees of stress for owners of retail property.
Most of the country’s largest malls are owned by huge public companies that are financially equipped to survive a downturn, but the stocks of many of them are trading near their 52-week lows.
And smaller owners that bought or developed property at the top of the market expecting high occupancy and high rents may face problems with their lenders. Some are already scrapping or delaying projects that are scheduled to be delivered this year.
Even landlords with relatively stable properties aren’t assured of escaping the credit crunch.
Investors are closely watching mall operator General Growth Properties Inc., which has $2.8 billion in debt coming due this year.
Meanwhile, for consumers, retail woes could mean more empty space in shopping centers and, in extreme cases, more failed projects, leaving suburban landscapes blighted with dark buildings set back on vast, empty parking lots.
Property & Portfolio Research foresees retail vacancies jumping to nearly 12 percent by the end of this year in the top 54 U.S. markets, up from 10.4 percent in last year’s third quarter.
Retail real estate is more closely tied to the housing market than other commercial-property types. As a result, retail landlords feasted in recent years on rapidly expanding tenants and easy financing as carefree shoppers spent their home equity with abandon.
Some 145 million square feet of new shopping-center, mall and other retail space was built in the top 54 markets last year, with another 123 million square feet in the pipeline this year, according to Property & Portfolio Research. In comparison, the annual average between 2000 and 2006 was 118 million square feet.
Few markets have taken as sharp a turn as the Phoenix metro area.
Yet despite Phoenix’s housing slowdown, 9.3 million square feet of new retail space was added last year and another seven million is expected this year. As a result, Phoenix’s retail vacancy rate is expected to double by the middle of next year, climbing to 10 percent from 4.8 percent at last year’s midpoint, according to Property & Portfolio Research.
Retail property values, which rose 12 percent in 2005, are expected to decline over the next three years.
