RETAIL MARKET REPORT: 3Q RETAIL SECTOR CONTINUES TO IMPROVE, DESPITE DROP IN CONSUMER CONFIDENCE KEY INDICATORS: Key retail market indicators continue to send mixed signals. Monthly retail sales (ex: motor vehicles and parts) remained positive, but below post-recession highs. The consumer sentiment index, as measured by Thomson Reuters and the University of Michigan, declined throughout the third quarter, ending at levels not seen since December. Consumer sentiment appears to have declined since the government shutdown, an unwelcome scenario right before the holiday shopping season. VACANCY: Overall, retail vacancy rates are tightening, albeit modestly. Power Centers lead the major segments with a 5.4% vacancy rate, down 20 bps from last quarter. Shopping Centers (Community, Neighborhood, and Strip centers) continued to report the highest vacancy rate at 10.1%, but the segment is showing strength, as rates are down 10 bps over last quarter and down 60 bps YOY. SUPPLY: New retail deliveries and starts increased this quarter. Approximately 11.1 msf of retail space was delivered in 3Q, a 35.1% decrease over the previous quarter and up 20.5% YOY. Retail construction starts also increased in 3Q to 8.3 msf for a 73.7% increase from the prior quarter, but are down 7.8% YOY. DEMAND: Retail absorption was positive once again in 3Q, marking the 17 th consecutive quarter of positive retail absorption at 16.9 msf, though it declined 4.3 msf from 2Q. This is slightly weaker than last quarter s 21.2 msf. Prepared by: Hasan Rahim Real Estate Market Research 249 Fifth Avenue Pittsburgh, PA 15222 412-762-8683 Hasan.Rahim@pnc.com RENTAL RATES: Although increases were moderate, retail rents continued to move slightly higher this quarter. Effective rents increased by approximately 0.3% during 3Q. The Power Center and Shopping Center segments are demonstrating the most stability in asking rates which have been relatively flat since 4Q. The Mall sector continues to experience downward pressure on average rental rates. CAPITALIZATION RATES: Retail cap rates displayed declines from 2Q, with mall s easing 7 bps to 6.48%, power center s declining 20 bps to 6.86%, and strip center s dropping 10 bps to 6.98%. Overall retail investment was robust at $17.6B in 3Q, a 45.2% increase from 2Q, and a 116.4% increase YOY. PNC is a registered service mark of The PNC Financial Services Group, Inc. This document is for general informational purposes only and is not intended as specific advice or recommendations. The information contained herein is gathered from public sources believed by PNC to be accurate and reliable at time of publication, but neither PNC nor any of its affiliates is providing any guaranty or warranty as to the accuracy, completeness or reliability of that information or of the conclusions presented in this document. In addition, markets do change. Opinions expressed herein are subject to change without notice. The information set forth herein does not constitute legal, tax or accounting advice. You should obtain such advice from your own counsel or accountant. Any reliance upon the information provided herein is solely and exclusively at your own risk.. The PNC Financial Services Group, Inc. All rights reserved.
RETAIL SECTOR CONTINUES TO IMPROVE, DESPITE DROP IN CONSUMER CONFIDENCE 2 KEY RETAIL INDICATORS Higher taxes and spending cuts do not appear to be having the drastic long term effect on consumers that was originally feared, but are starting to give consumers pause. Retail sales in 3Q indicated that consumers are spending amid continued economic uncertainties. Although retail sales weakened each month during 3Q, retail sales totaled $885.9 billion, an increase of 3.9% over 3Q. It should be noted that YOY monthly retail sales growth remains constrained below 5.0% (a figured surpassed only in July) and well below levels seen in the mid-2000s and even following the recent recession. Early 4Q (October) data indicates slight YOY retail sales growth of 2.7%, providing optimism, as consumers close in Year-Over-Year Percentage Change 15.0% 1 5.0% -5.0% -1-15.0% U.S. Retail Sales (Excluding Motor Vehicles and Parts) Not Seasonally Adjusted Source: Census Bureau, Economy.com, PNC Real Estate Research Recession December - June on the important holiday shopping season. According to PNC s National Economic Outlook (November/December ), holiday sales will be up 3.0 to 3.5% from a year ago. The adjacent chart illustrates the consumer sentiment index, as measured by Thomson Reuters and the University of Michigan. The index declined 8.9% in 3Q from a high of 85.1 (July) to 77.5 (September). Preliminary 4Q results indicate further confidence declines, as the sentiment index reached 72.0 in November. Sustained declines this rapid have not occurred since June, when the index contracted from 74.3 to 59.4 to a low of 55.7 (August ). With declining consumer sentiment through 3Q and into early 4Q, the government crisis appears to have deterred consumers significantly. Thomson Reuters reported that lower-income households are worried about their job prospects and financial outlooks, while negative views of the government lingered. This is an unwelcome scenario as the economy enters the holiday shopping season. Consumer Sentiment Index 110.0 100.0 90.0 80.0 70.0 60.0 Index of Consumer Sentiment - October Recession December - June 50.0 40.0 Source: Thomson Reuters, University of Michigan
RETAIL SECTOR CONTINUES TO IMPROVE, DESPITE DROP IN CONSUMER CONFIDENCE 3 RETAIL MARKET TRENDS Vacancy Vacancy continues to tighten, albeit slowly. According to Reis, 3Q was flat compared to the previous quarter, remaining at 10.5%. CBRE reported a 30 bps drop in vacancy to 12.0%, compared to last quarter. While rates remain elevated, there are signs that the metric is starting to move lower. CBRE and REIS forecasts indicate a protracted recovery with vacancy rates expected to remain at or above 1 through 2015. Negligible changes were reported at the segment level during the third quarter. The Shopping Center segment (Community, Neighborhood, & Strip Centers) remained the retail sector with the highest average vacancy at 10.1% as of 3Q, down 10 bps over the previous quarter and down 60 bps from a year ago. Vacancy for the Power Center segment has declined for the past eight quarters. The Power Center segment reported a decline in vacancy in 3Q.to 5.4%, an 80bps decline YOY. Vacancy rates for the Mall segment (Regional, Super Regional, & Lifestyle Centers) declined 10 bps this quarter to 5.9%. While Class A properties enjoy tight vacancy, Class B/C properties with limited opportunity for redevelopment or repositioning continue to weigh on the segment overall, despite limited new supply. According to CoStar, coastal markets such as New York City, San Francisco, Miami, and Boston are maintaining very tight retail market fundamentals. The majority of the top 15 markets with the lowest overall retail vacancy rates reported flat or declining rates YOY. Markets with the highest retail vacancy remain clustered in western and central markets. Phoenix, Las Vegas, and Detroit, continue to report double digit or near double digit retail vacancy rates. On a positive note, the majority of lagging markets are seeing a tightening of retail vacancy, thanks to very limited new supply and slight improvements in local economic conditions. 15.0% 12.5% 1 7.5% 5.0% 2.5% CBRE REIS 2000 2001 Source: CBRE,REIS, PNC Real Estate Market Research 11.5% 10.5% 9.5% 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% 2.5% TOTAL RETAIL VACANCY RATES - 3Q 75 Largest U.S. Retail Markets bp Change over 3Q LAGGING MARKETS Vacancy bp Change over 3Q LEADING MARKETS Vacancy New York City 2.6% 50 Phoenix 10.5% -130 San Francisco 2.6% -10 Las Vegas 1-70 Hawaii 2.6% -30 Memphis 9.7% 30 Miami-Dade County 4.1% 10 Detroit 9.6% -60 Pittsburgh 4.3% -40 Atlanta 9.6% -40 Boston 4.4% 0 Sacramento 9.2% -80 Salt Lake City 4.4% -40 Kansas City 8.8% -40 Albany/Schenectady/Troy 4.4% -40 Inland Empire 8.7% -10 Washington 4.6% -10 Birmingham 8.6% -30 San Diego 4.6% -40 Cleveland 8.6% 50 South Bay/San Jose 4.6% -60 Dayton 8.5% -40 Long Island (New York) 4.6% -10 Fresno 8.4% 0 East Bay/Oakland 4.8% -10 St. Louis 8.3% 30 Minneapolis 5.1% -20 Chicago 8.2% -20 Austin 5.1% -20 Cincinnati 8.1% -70 Q1 Q2 Q3 FORECAST 2014 U.S. Retail Vacancy by Segment Shopping Centers: 10.1% Malls: 5.9% Power Centers: 5.4% 2015
RETAIL SECTOR CONTINUES TO IMPROVE, DESPITE DROP IN CONSUMER CONFIDENCE 4 Supply New retail construction starts improved in 3Q, but remained at historically low levels. For the quarter, starts totaled 8.3 msf, an increase of 73.7% over the previous quarter. Compared to the same period one year ago, construction starts were down 7.8%. Deliveries remain suppressed and well below the average of 25 msf added quarterly between 1982 and. As shown in the adjacent chart, new retail construction deliveries rose in 3Q. Deliveries increased by 11.1 msf this quarter, up 35.1% over the previous quarter. Although limited starts and deliveries are indicative of continued struggles for the sector, the lack of development has served to help sustain the retail segment in the face of weakened demand. Despite a recent increase in deliveries in Millions of Square Feet 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2Q 3Q 4Q 1Q 2Q Source: CoStar, PNC Real Estate Research *Select markets 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% Atlanta Chicago Houston Minneapolis 3Q Tampa/St Petersburg 4Q 1Q 2Q Construction Starts & Deliveries* - 3Q 4Q 1Q Construction Starts Orange County (California) 2Q 3Q 4Q 1Q Deliveries 4Q, both starts and deliveries will likely remain low in the short-term, until sustained economic growth returns. Markets While new retail construction remains low nationally, select metro areas are reporting notable additions. New construction in the most active markets during 3Q totaled 18.9 msf, or approximately 45.1% of the 42.0 msf of space currently underway. As a percentage of existing supply, the Las Vegas market has the most space under construction, at 1.6%, as of 3Q. Approximately 85.8% of total retail space underway in Las Vegas is at the 1.5 msf Shops at Summerlin Centre, a previously stalled super regional mall project. Omaha/Council Bluffs and Washington, D.C. followed Las Vegas with construction underway representing 1.3% and 1.0% of each market s current retail supply. The Dallas-Fort Worth market led in total New Construction as a % of Existing Supply % of Existing Supply % Preleased 1.2 0.9 Source: CoStar, PNC Real Estate Research 2Q 3Q 4Q Construction Activity - Top Construction Markets 0.8 0.9 1Q 2Q Listed in Order of New Construction as a % of Existing Supply 100% 1.0 Sf Under Construction (Millions) retail construction with 3.3 msf underway. A major portion of this square footage is comprised of the 1.9 msf Nebraska Furniture Mart retail store and distribution center currently under construction in 3Q, with delivery expected in 2Q2015. Much of the new construction currently underway in the 15 top markets is substantially preleased, which will help keep vacancy rates stable in light of new deliveries. 1.0 Westchester/So Connecticut Sacramento 2.2 Boston 0.9 Miami-Dade County 0.8 Austin 3.3 Dallas/Ft Worth 2.1 Washington Omaha/Council Bluffs 1.7 Las Vegas 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 3Q % Preleased
RETAIL SECTOR CONTINUES TO IMPROVE, DESPITE DROP IN CONSUMER CONFIDENCE 5 Demand This quarter marked the 17 th consecutive quarter of positive retail absorption nationwide. Net absorption was reported at approximately 16.9 msf for the quarter, down 3.4 msf from 2Q. Third quarter absorption is running ahead of the fouryear quarterly average. Solid first, second, and third quarter results in comparison to recent years is generating optimism for the remainder of. While early results are positive nationally, wide variation still exists at the market level. Markets All 10 of the top U.S. retail markets (by total GLA) experienced positive absorption over the last 12 months. The Dallas-Fort Worth market saw the highest level of annual retail absorption at 5.5 msf, up from 4.3 msf compared to a year ago. Other markets reporting significant increases from a year ago included Chicago and Los Angeles, which are up 4.1 msf and 2.1 msf, respectively. Selected additional retail markets have fared well, with most reporting similar or greater levels of trailing twelve months (TTM) retail absorption in 3Q over the same period in the previous year. The Phoenix market reported a dramatic increase with 4.4 msf absorbed in versus 2.3 msf in. The Denver market also saw strong TTM absorption this quarter, with 2.7 msf compared to msf in. Another market showing improvement from a year ago was Minneapolis, which absorbed 1.7 msf in 3Q versus msf a year ago. Net Absorption (000s sf) Net Absorption (000s sf) 60,000 50,000 40,000 30,000 20,000 10,000 - (10,000) Source: CoStar 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0-1,000,000 Source: CoStar 5,000,000 4,500,000 28.0 51.3 30.2 Chicago Los Angeles Long Island Philadelphia Houston Washington, D.C. U.S. Quarterly Average Net Retail Absorption -0.82 13.7 Q1 Q2 Q3 12.3 CoStar 3Q: 16,917,634 sf 12.7 16.7 21.2 Net Retail Absorption - Additional U.S. Markets Net Retail Absorption 3Q TTM Net Retail Absorption 3Q TTM Detroit Atlanta Boston Dallas/Ft. Worth Net Retail Absorption - Additional U.S. Markets Net Retail Absorption 3Q TTM Net Retail Absorption 3Q TTM 16.9 4,000,000 3,500,000 Net Absorption (000s sf) 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 Source: CoStar 0 NYC (Manhattan) Orange County Miami-Dade Denver Minneapolis Charlotte Las Vegas Baltimore Seattle Phoenix
RETAIL SECTOR CONTINUES TO IMPROVE, DESPITE DROP IN CONSUMER CONFIDENCE 6 Rental Rates Both CBRE and Reis reported moderate effective rent growth of approximately 1.6% in 3Q (annualized). According to Reis, the figure increased 40 bps from last quarter while CBRE indicated a return to growth after last quarter s negative rent growth. Effective rent growth has only recently been reported as of, following several years of decline brought on by the recession and an associated reduction in retail spending. Both CBRE and Reis are forecasting effective rent growth of 1.2% to 1.4% for the remainder of compared to just 0.5% in. For the major retail segments, CoStar reported flat or slight declines in asking rates. In 3Q, average Power Center rental rates were reported at $16.63 per sf, a decrease of % over 2Q and flat YOY. This segment is showing resiliency in the face of several major big box closings in recent years who typically anchor these centers. At $14.04 per square foot, average rates for Shopping Centers were up 0.1% against the previous quarter and are down 1.1% YOY. Mall rental rates were down 2.2% over last quarter and down 8.0% YOY. Despite the strength of the Class A product in this segment, it is clear that the inferior B/C product continues to be a drag on rental rates, as landlords attempt to fill space in lower quality assets. Markets According to CoStar, 40 of the 75 largest U.S. retail markets saw a YOY increase in retail asking rates this quarter. Increases for this quarter were slightly stronger than the previous quarter, with top markets reporting increases ranging from 2.1% to 14.0%. Last quarter s top markets reported increases of 2.0% to 7.0%. Boston led with a 14.0% increase in rates, followed by Long Island at 7.5%. Lagging markets this quarter are widely distributed throughout the U.S. The Knoxville, TN market saw the greatest decline in average retail rental rates with a drop of 8.8% YOY, followed by Columbia, SC, which was down 8.6%. 6.0% 4.0% 2.0% -2.0% -4.0% -6.0% Average Rental Rate per Square Foot (NNN) 2000 $26.00 $24.00 $22.00 $20.00 $18.00 $16.00 $14.00 $12.00 CBRE REIS 2001 Source: CBRE, REIS, PNC Real Estate Market Research 1Q 2Q 3Q 4Q 1Q 2Q 3Q TOTAL RETAIL RENTAL RATES - 3Q 75 Largest U.S. Retail Markets Rental Rate (NNN) Pct. Chg. Over 3Q Rental Rate (NNN) Pct. Chg. Over 3Q LEADING MARKETS LAGGING MARKETS Boston $17.56 14.0% Knoxville $10.30-8.8% Long Island (New York) $28.51 7.5% Columbia $11.05-8.6% Baltimore $19.15 6.9% Hawaii $30.20-7.9% San Francisco $30.38 5.7% Inland Empire (California) $15.72-6.1% Little Rock/N Little Rock $10.83 5.6% Austin $17.47-6.0% Omaha/Council Bluffs $10.89 5.3% Greensboro/Winston-Salem $10.09-5.8% New Orleans/Metairie/Kenner $14.50 4.8% Milwaukee $10.66-5.6% Westchester/So Connecticut $21.89 4.7% Las Vegas $15.25-5.6% Raleigh/Durham $14.60 4.6% Charlotte $12.44-5.4% Indianapolis $12.13 4.0% Rochester $10.66-5.0% San Diego $21.69 3.6% Memphis $9.70-4.0% South Bay/San Jose $27.37 3.1% East Bay/Oakland $20.67-3.8% Broward County $17.99 2.7% Albuquerque $12.91-3.8% Denver $14.89 2.5% Stockton/Modesto $14.31-3.3% Birmingham $9.84 2.1% Salt Lake City $12.81-3.3% EFFECTIVE RENT GROWTH 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Q1 1Q ANNUALIZED Q2 2Q Q3 3Q 4Q 1Q FORECAST 2014 U.S. Retail Asking Rates by Segment Shopping Centers: 10.1% Malls: 5.9% Malls: $16.42 Power Centers: 5.4% Power Centers: $16.63 Shopping Centers: $14.04 2Q 2015 3Q
RETAIL SECTOR CONTINUES TO IMPROVE, DESPITE DROP IN CONSUMER CONFIDENCE 7 RETAIL CAPITALIZATION RATE TRENDS RETAIL CAP RATES Average Quarterly Annual Mall 7 27 bps 6.48% 1.1% 4.2% Value Strip 10 19 bps 6.98% 1.4% 2.8% Value Power 20 25 bps 6.86% 2.9% 3.7% Value As seen in the table on the left, cap rates declined across all retail segments on both a sequential and annual basis. Overall retail investment was robust at $17.6B in 3Q, a 45.2% increase from 2Q, and a 116.4% increase YOY. Despite the recent hike in interest rates, 2Q sales volume surged rivaling levels recorded in. Additionally, RCA reported that forward momentum appears strong with over $6.0B of retail property closed or in contract for 4Q. Moody s/rca CPPI index for retail nationally is up 17.0% this year, highest of all property types. $30 $25 $20 $15 $10 $5 $0 Retail Sales Volume ($ Billions) Through Q3 $17.6 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Real Capital Analytics 11% Capitalization Rates Retail Mall - United States Through Third Quarter 10% 6.50% - PwC Mall 2 bps, +0.3% 9% 6.30% - RERC Mall 10 bps, +1.6% 8% 6.64% - RCA Mall 9 bps, +1.3% 7% 5.65% - NCREIF Retail 6% 1 bps, -0.2% Note: NCREIF data represents current value retail cap rates. Sources: PwC Real Estate Investor Survey, Real Capital Analytics, RERC, NCREIF, PNC Real Estate Market Research Capitalization Rates Retail Power and Strip Center - United States Through Third Quarter 11% 10% 7.44% - RCA Strip Center 5 bps, +0.6% 7.10% - RERC Power Center 20 bps, +2.8% 9% 6.91% - PwC Strip Center 8% 7% 6% 4 bps, +0.6% 6.71% - PwC Power Center 4 bps, -0.6% 6.60% - RERC Strip Center 20 bps, +3.0% 5.65% - NCREIF Retail 1 bps, -0.2% Note: NCREIF data represents current value retail cap rates. Sources: PwC Real Estate Investor Survey, Real Capital Analytics, RERC, NCREIF, PNC Real Estate Market Research