Though vacancy rates at shopping centers in the United States are not expected to peak until 2011 at around 12.2 percent, the going consensus is that for the most part, the worst of the retail crisis has passed. Too much supply has been part of the problem. Between 1999 and 2008, 25 million to 30 million square feet (2.3 million to 2.8 million sq m) of new shopping center space was added to the market annually, says Ryan Severino, an economist with Reis. This year, the volume of new center completions will likely be around 2.5 million square feet (232,000 sq m), according to CBRE Econometric Advisors. Absorption is expected to turn positive in the fourth quarter, but rents will likely continue to decline through 2012, dropping 2.9 percent this year and 0.4 percent in 2011.
Properties completed after 2005 will be most affected because their leases are now 30 to 40 percent above average market rates. Class B and C malls will lose stores as chains consolidate into better malls, says ULI/PricewaterhouseCooper’s Emerging Trends in Real Estate 2010, which rates the top retail markets (for buying/holding assets rather than selling) as Washington, D.C., Seattle, New York City, San Francisco, and Houston. During the next decade, retail development will undergo a major makeover, with some models proving more viable than others.
The most successful department stores, for example, will be consumer driven and focused on rebuilding relationships with core customers, using technology to get to know customer preferences. Big-box retailers such as Walmart are planning new boutique stores and looking at inner-city store sites. Outlet malls will be well-positioned to capitalize on the new value proposition. The demand for walkable, mixed-use, high-density community spaces will support integration of increasingly dynamic leisure time uses in retail environments, while some malls may continue to solicit increasingly nonretail uses, such as artist studios, theaters, junior colleges, medical facilities, museums, and training facilities.
With less stock, some stores are morphing into showrooms that help customers find goods online. With fewer retail tenants, creative solutions are being found for more efficient store layouts and design. Temporary pop-up shops are trying to draw in shoppers using a sense of excitement and urgency. And environmental considerations and building code changes will lead to more green stores.
Though a number of traditional retailers are moving to e-commerce, growth in online retailing is not expected to adversely affect industrial development. The sector is continuing to streamline operations and consolidate space or relocate near multimodal transport options. Most recent deals are for greener speculative buildings.
A number of expected infrastructure enhancements will improve the efficiency of goods transport. The Transportation Investment Generating Economic Recovery (TIGER) discretionary grant program, part of the American Recovery and Reinvestment Act, is targeting billions of dollars to the Crescent and National Gateway corridors; in addition, the Panama Canal will be expanded to accommodate larger container ships. The ability of trucks and rail companies to increase the flow of goods through ports will create economic development opportunities miles away, and make inland and infill locations more attractive for distribution centers.
Because it will be 2011 before any reductions in vacancy occur either in retail or industrial space, this is the year of positioning. The challenge for experienced developers is to demonstrate sufficient insight, innovation, and redevelopment savvy to take advantage of what could lay ahead.