Report reveals strongest and weakest retail real estate markets

Seattle -- New York City, Washington, D.C., San Francisco and Seattle, top the list of the strongest retail real estate markets, according to Colliers International’s “Third Quarter 2011 North American Retail Highlights” report. The weakest markets include Phoenix, Detroit, Atlanta and Las Vegas, which continue to experience vacancy rates at or above 15%.



The study finds that the national retail real estate sector will likely close 2011 much as it began: in a slow growth mode and with a wait-and-see attitude among investors, developers and retailers alike. Aside from strong performers, publicly traded companies, investors and retailers are likely to be conservative with their real estate plans until at least the middle of 2012.



According to the report, the third quarter national retail real estate vacancy rate was flat quarter-over-quarter, at 10.8%, a rate that has experienced little variation over the past eight quarters. On a positive note, absorption increased nearly nine-fold quarter-over-quarter, to 5.1 million sq. ft., the nation's highest level in more than two years. In addition, approximately three-quarters of the 60 retail markets Colliers tracks recorded positive absorption year-to-date, led by Denver (+1.2 million sq. ft.), Houston (+749,000 sq. ft.) and Greenville/Spartanburg (+623,000 sq. ft.). Leasing activity is still moderate, with average asking rents essentially flat, at $15.52 per square foot.



One of the quarter's biggest stories was Borders' liquidation of its remaining 399 stores, with an estimated $1 billion+ in lease obligations. The stores, many in "A" locations, caught the eye of more than a dozen interested parties, including Barnes & Noble and Books-A-Million (which purchased 14 Borders leases), college bookstores, grocers, Hhgregg, Ross and luxury discounters. Landlords face significantly tougher economics, often having to backfill these vacated spaces with replacement retailers paying as much as 40% to 50% less in rent, as Borders' pricier build-outs had driven up occupancy costs no longer sustainable in the current market.



"We remain in a complex operating environment, and reflecting the overall economy, retail real estate will face near-term challenges and may even see some further contraction," said Dylan Taylor, chief executive officer for Colliers International in the United States. "But there is pent-up demand for quality assets with consumers eager to resume strong spending habits. Once the overall market stabilizes, the retail sector is poised for a strong rebound."



Additional highlights from the full research report, which analyzed the 60 largest retail markets in the nation, are listed below:

• Luxury remains the savior of retail, both full-price and outlet. High-end retailers such as Saks Fifth Avenue and others have returned to focus on their core loyal shoppers, and increasingly look to growth in their outlet programs to sustain profitability.


• Chain drugstore growth continues to be driven by the needs of an aging population. Interestingly, the five states with the highest chain drugstore count per capita are all located in the Northeast and Mid-Atlantic (Rhode Island, Delaware, Massachusetts, New Hampshire and West Virginia, plus the District of Columbia), rather than in traditional retirement capitals such as Florida, Arizona and North Carolina.


• Though grocery-anchored projects (and the steady traffic generated) have typically been viewed as stable, recession-proof assets, the segment may consolidate in the coming years.