these smaller stores diverges in the coming year, especially as the marketplace provides more opportunities to evolve: Some big box chains that originally announced smaller prototypes (25,000 SF to 15,000 SF) are now moving right into testing of even smaller spaces, 6,000 to 7,000 SF.
OUTLETS, OUTLETS, OUTLETS During the early days of the economic recovery, outlet projects were among the few ground-up retail projects palatable to risk-averse lenders. Higher sales productivity did, and still does, make retailers more receptive to paying higher rents, and consumers’ surging demand for value-priced product suggests continued opportunity for sector growth. Late 2012–2013 marked the beginning of the surge in outlet center openings. How many of the proposed outlets will actually get built? If they all open, how many will perform well? Time will tell, especially in markets such as Toronto, Charlotte, and St. Louis, where multiple projects are competing fiercely for the same set of tenants.
FOREIGNERS STILL LOVE THE U.S. It remains one of our favorite analogies: The U.S. is “the cleanest shirt in the laundry” with respect to real estate investment. The concentration of quality assets—approximately 25% of the world commercial inventory according to Prudential Real Estate Investors—as well as the U.S.’s “safe haven” status will continue to comfort foreign investors and attract capital this year. Overseas investors, even those focused on capital preservation, are moving away from Treasuries and farther out onto the risk curve. Sovereign wealth funds have stepped up, led by Norway’s NOK3.7 trillion (USD $661 billion) Government Pension Fund Global, which announced before the holidays that it would begin investing in U.S. real estate: one-third of its five percent target for the asset class. Granted, its first commitment, announced last week, was for Core office space (a $1.2 billion deal with TIAA-CREF), but we see retail as a viable recipient of sovereign funds seeking partial interest in trophy assets either as an acquisition or a recapitalization opportunity with a good partner.
INCREASED COMFORT WITH SECONDARY MARKETS Savvy investors recognized improving macroeconomic trends during 2012, but the market’s risk-averse nature diverted the lion’s share of U.S. retail investment capital to Core markets despite their record-low yields. During our meetings with institutions last year, we heard many of them express interest in non-core markets—only to cite the execution challenge (especially for those representing foreign capital) of coaxing investors away from the top five or ten U.S. cities with well understood market fundamentals. Since Colliers began tracking secondary markets more than 18 months ago, we have tracked their accelerating improvements in housing and employment relative to Core markets. Aided in some areas by business-friendly corporate tax policies, strong secondary markets are becoming the economic growth engines that lift the performance and prospects of local real estate, especially for retail space which is so dependent on employment and consumer spending. This well-defined shift in risk-reward tradeoff is creating attractive yield potential on develop-to-core strategies or the acquisition of higher-vacancy properties. We project a significant increase in secondary market investment, from both domestic and foreign capital, in 2013, especially given future interest rate risk and increasing pressure being placed on institutions to deploy capital after years of conservative investing.
CONCLUSION Even as the economy improves, the retail real estate sector remains vulnerable to shocks that affect both consumer and investor sentiment. However, the slow recovery from the 2007–2008 downturn while it damaged aspects of the sector, also left behind as its survivors firms primed to outperform: they better understand what differentiates them in the eyes of their customers and know how they must operate to compete effectively. We expect process refinement and brand evolution to continue throughout the retail sector 2013 as competition intensifies, continuing to marginalize weak performers and reward those with the vision and confidence to innovate.
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