Commercial Real Estate

Rising Occupancy Should Bring Growth In Retail Rents By Year-End

Falling vacancy rates and rising demand for commercial properties should finally bring about meaningful rent growth for landlords in most U.S. retail markets by the end of 2011, according to CoStar Group economists.

Growth in employment and moderately rising demand fueled by greater numbers of shoppers and little new supply of retail space development on the horizon should set the stage for a significant drop in vacancy rates, which CoStar expects to fall as low as 5% by late 2014.

Increasing occupancy is expected to lead to increasing rental rates, which have been in decline since the recession. By the end of this year, rents should turn positive across the U.S. and from there rise fairly rapidly, peaking at about 6% growth annually by 2014.

While the negligible new supply is allowing retail real estate to turn the corner, the future depends on job and wage growth levels. Retail sales have already returned to 2007 levels, with year-over-year growth in the 6% range for the last couple quarters — well above the historical range of 4.5% to 5%.

Retail leasing volume has also picked up, with CoStar projecting more than 53 million square feet of retail space leased in the first quarter. While the increase is not yet translating into large gains in net absorption — just 9 million square feet of absorption nationwide in the first quarter, the lowest since fourth-quarter 2009 — the heightened activity and diminished supply kept the national vacancy steady in the first quarter at 7.2%.

With fewer new commercial listings available, vacancy rates are finally cresting. The majority of retail submarkets tracked by CoStar showed declining vacancy rates in the first quarter, with the strongest declines in Northeast and Texas markets like Houston, Detroit, Denver, Boston and Philadelphia.

Housing-bust markets like Phoenix and the Inland Empire still are seeing vacancies well above their historical average. Among product types, lifestyle centers and to a lesser degree malls are seeing vacancy rates tick down.

While the situation is expected to reverse quickly as existing supply gets leased up, overall rents are still edging downward year over year across the retail spectrum. Similarly to occupancy and absorption, rents are improving at different rates in different markets and product types.

While the nation's overall growth rate of around 3% annually isn't spectacular, it is strong enough to generate jobs, gradually bringing down the unemployment rate and creating renewed positive absorption. The meaningful recovery in commercial real estate is expected to gather momentum over the course of this year and into 2012.

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