Report: Tenuous retail recovery continues as employment gains accelerate

Chicago— A report released by Chicago-based Jones Lang LaSalle found that the retail sector is edging toward recovery driven by growth in job market, gains in corporate profits and improvements in credit markets.

According to Jones Lang LaSalle’s North America Mid-Year Retail Outlook, the environment is still not without risk as rising fuel costs and a continued weak housing market, coupled with an increasingly volatile global geopolitical climate, continue to slow retail recovery as consumers remain tentatively cautious.

Nonetheless, said the report, retailers, landlords and investors can leverage pent-up consumer demand, strategic market opportunities and leading-edge technology to increases sales and strengthen their businesses.

Among the retail outlook highlights, national retail vacancy levels dropped slightly from last quarter’s level of 7.2% to 7.1%, posting a year-over-year drop of 30 basis points. Rents decreased 2.8% year over year, and inched down 0.3% since the last quarter to the current national average of $14.86.

As well, investment sales volume of significant retail properties totaled $5.8 billion in the first quarter of 2011, up a sharp 53% from the same period in 2010.

Thirteen of the 14 markets tracked by Jones Lang LaSalle are still tenant favorable, said the report, and are likely to remain that way for the next quarter or two. Houston is the only market that is showing a significant rise in rental rates.

“Though several factors are still undermining a robust retail recovery, renewed consumer confidence driven by widespread payroll gains is creating a perfect environment for the retail industry to deliver innovation to the marketplace through better products, services, and go-to-market strategies,” said Greg Maloney, CEO and president, Jones Lang LaSalle Retail, based in Atlanta.

“Brands and concepts that appeal to the new global and connected consumer while solving the many challenges surrounding real estate, sourcing, supply chain, marketing, e-commerce, will rise to the top.”

Notably, retailer expansion is on the rise with current growth plans up approximately 40% from levels recorded in 2010. Retailer contraction is subsiding, with only 700 stores closing in the fourth quarter of 2010, down 53% from the same quarter in 2009.

As part of its 2011 outlook, JLL said that fuel prices will be a major determinant in the health of retail this year. “Rising gas costs are already driving consumers to discounters such as CostCo, both for fuel and to save on general merchandise,” read the report. “This will further polarize retail sales to the ultra-discounter and to luxury retailers whose customers can better absorb such price increases. Significant and sustained increases in fuel costs could seriously curtail spending this year and swing the entire economy back into recession.”

Retailers with cash reserves will expand confidently in 2011, said the report, while store closings will most likely return to 2005 levels of approximately 4,300. Lower rental rates and better lease terms will generate increased attention for malls from non-traditional retailers such as groceries and big boxes. Prime vacant space in power centers as Borders vacates should act as a catalyst for positive absorption as well.