Emerging Trends in Real Estate 2012 - Urban Land Institute

Retail
ExHIBIT 4-18
Retail Investment Prospect Trends
good
modestly good
fair
modestly poor
poor
2004
Source: Emerging Trends in Real Estate surveys.
2012 Prospects Rating Ranking
Investment Prospects 5.28 Fair 7th
Development Prospects 3.77 Modestly Poor 6th
Buy
38.0%
Source: Emerging Trends in Real Estate 2012 survey.
Note: Based on U.S. respondents only.
Hold
41.9%
Expected Capitalization Rate, December 2012 7.1%
Sell
20.2%
2012 Prospects Rating Ranking
Investment Prospects 4.39 Modestly Poor 9th
Development Prospects 2.79 Poor 9th
Buy
10.0%
Hold
53.2%
Expected Capitalization Rate, December 2012 7.5%
Sell
36.8%
2012 Prospects Rating Ranking
Investment Prospects 4.26 Modestly Poor 10th
Development Prospects 2.40 Very Poor 11th
Buy
12.2%
2005
2006
U.S. Neighborhood/Community Centers
U.S. Power Centers
U.S. Regional Malls
Regional Malls
2007
Hold
60.9%
2008
Power Centers
Expected Capitalization Rate, December 2012 6.8%
Neighborhod/Community
Shopping Centers
2009
2010
2011
2012
Sell
26.9%
Strengths
It’s all relative: in view of the depths of the housing crisis and consumer
distress, the shopping center sector “hasn’t done badly.”
Fortress mall occupancies and rents tick up. Owners will not sell
these “irreplaceable,” “almost priceless” assets where retailers
cluster and shoppers concentrate. Store chains look for space in
the strongest gateway markets where a shortage exists in prime
locations, and some European brands take advantage of the weak
dollar and expand U.S. footprints. “Nothing new has been built
in several years, creating undersupply in these few select areas.”
The recession alters buying habits: shopping centers need to
focus on “consumers’ value-driven orientation, delivering product
more cheaply and conveniently without frills.” Infill “necessity retail”
will do fine near neighborhoods that sidestepped housing woes,
and investors bid up prices to borderline nosebleed levels, trying
to capture steady, highly reliable revenue flows.
Weaknesses
Away from wealth islands, the retail world undergoes stressful
transformation. “Essentially, people don’t have as many dollars
to spend,” and e-commerce continues to “compound its market
share,” now heading for 10 percent. “The web starts to be a big
deal” beyond just the loss of book and record stores and creates
uncertainty over which merchandise sector will be next to
fall. “What I don’t know or anticipate scares me,” says an investor.
More retailers shift to smaller store-as-showroom models
with less merchandise, encouraging customers to buy off the
internet for wider selections. They also aim to use less backroom
space for storage, reducing real estate bills further. Prospects
for overall space needs shrink: “One-third of regional malls
should be bulldozed. We don’t need new retail.” At midlevel
centers, store chains aggressively “negotiate down lease terms.”
“They play ‘take my terms or I’ll close down my store.’” The big
problem remains the wobbly consumer in the midst of deleveraging
who cannot sustain buying off paychecks that don’t grow
much. “Many big-box brands look vulnerable,” and the venerable
department store format remains under siege. “A lot of
marginal retail product will limp along indefinitely.”
Best Bets
Retail real estate developers and investors must think outside
the box. “The major players begin to look at retail very differently”
and consider greater integration of e-commerce and
bricks-and-mortar merchandising. The recession aftermath,
consumer gloom, and internet incursions push existing malls
more toward different formats—either upscale social gathering
spots or merchandise distribution hubs. Fortress malls could
evolve into centers of “well-ambienced, high-touch, smaller
stores with visual appeal, which retailers use for brand recognition.”
Food and entertainment become even more important for
54 Emerging Trends in Real Estate ® 2012