Connecting the Dots on Retail, Mixed-Use Investment Sales
Given the ICSC convention in New York this week, we will take a look at the investment-sales market for properties where retail stores are the primary drivers of revenue.
In 2010, the retail and mixed-use property sectors have seen strong activity. The retail sector has seen sales-volume increases, both in terms of the number of properties sold and the dollar volume; this is not surprising given the extraordinarily low levels of activity seen in 2009. Within the mixed-use sector (mixed-use properties are those where retail tenants occupy at least 25 percent of their gross square footage, with residential apartments above), we have seen similar increases in the number of buildings sold and in the dollar volume of sales over 2009 levels.
In 2009, there were 143 retail properties sold in New York City, having an aggregate dollar volume of approximately $445 million. Through Nov. 15, there have been 160 retail properties sold, having a market value of approximately $760 million. These figures reflect increases of 12 percent in the number of properties sold and 71 percent in the dollar volume of sales, without taking into consideration transactions that will close in the last six weeks of the year. Within the mixed-use sector, in 2009 there were 238 properties sold, having a market value of approximately $416 million. Through Nov. 15, there were 286 mixed-use properties sold, having a market value of approximately $525 million. The increases here are 20 percent and 26 percent, respectively, without annualizing these figures.
Whether these percentage increases, and optimistic numbers, are reflective of positive fundamental developments within the retail sector, or simply a result of the expected increases from anemic 2009 levels can be determined by analyzing value trends within these sectors.
On a price-per-square-foot basis, within the retail sector, values have continued to slide in 2010 from 2009 levels. In the mixed-use sector, values, on a price-per-square-foot basis, have increased in 2010 in all submarkets over 2009 levels, with the exception of one. The residential component of mixed-use properties has clearly helped value within this sector.
If we take a step backward and look at how the retail and mixed-use sectors have performed over time, we see that they have been adversely affected in a tangible way by the recent recession. The erosion of consumer confidence and the evaporation of consumer spending drove value in these two sectors down significantly from their 2007 peaks. Mixed-use properties saw average price-per-square foot values drop by 46 percent in 2009 from their 2007 highs. Properties within the retail sector saw values decline by 49 percent from their peak.
It is not difficult to understand how these two sectors took such a beating if we consider how the recession has impacted consumer behavior. The Bureau of Labor Statistics shows that in 2008, consumer spending had increased 1.7 percent versus 2007. However, BLS statistics show that, in 2009, consumer spending was down by 2.8 percent from 2008 levels.
THE UNITED STATES has also experienced a significant shift in savings patterns. In early 2007, the savings rate in the U.S. had reached minus 4 percent. In October of 2010, the savings rate reached 5.7 percent. This nearly 10 percent shift in savings habits has had a significant impact on our gross domestic product.
Consider that the U.S. has a G.D.P. of approximately $14 trillion and approximately 70 percent of that total is consumer driven. This means that roughly $10 trillion of output in America is the result of consumer spending. The 10 percent swing in the savings rate extracts about $1 trillion from our economy annually. That is a significant amount of consumption to do without.
Consumers are indeed saving more and are cautious about increasing discretionary spending based upon many factors that they are concerned about in our economy. For the average American, a home is their largest asset, and the level of equity in that home provides a “wealth effect” that has significant psychological implications for spending habits. In the bubble-inflating years of 2005 through 2007, financing terms were easy, and many homeowners used home-equity withdrawal to fuel retail purchases. As home prices declined, the use of houses as ATM machines was all but eliminated. Today, home sales remain sluggish, leaving consumers on edge.
Unemployment remains stubbornly high as job creation was far below expectations in November, with only 39,000 jobs being created and the unemployment rate increasing to 9.8 percent. Additionally, all the headlines and news reports about the massive U.S. deficit and deficit-reduction potions have Americans more aware than ever about the impact of debt on financial solvency. Consumers are less likely today to exploit credit cards than they were years ago.
Notwithstanding the facts mentioned previously, the National Retail Federation has projected consumer spending will increase by 2.3 percent in November and December 2010, versus the same period last year. This is due, in part, to the surge in retail store reward-bonus programs and store-loyalty incentives. Credit card companies have also aggressively increased their cash-back rates, and some have even initiated premium return-protection services to entice shoppers. An analysis of these programs shows that they are truly only beneficial if consumers pay off 100 percent of their balances each month and don’t carry outstanding debt.