October 8, 2009
The retail vacancy rate (neighborhood and community centers) in the US is up 190 basis points over last year, reaching a 17-year high of 10.3%. At regional and super-regional malls, vacancies are up 200 basis points YoY to 8.6%.
“Until we see stabilization and recovery take root in both consumer spending and business spending and hiring, we do not foresee a recovery in the retail sector until late 2012 at the earliest,” Victor Calanog, Reis research director, said in a statement.
There is going to be a serious amount of distress in retail, particularly stemming from loans made by regional and community banks on smaller strip centers and single-tenant NNN assets. Many of the investors who flooded into this sector of the market were first time CRE investors, and bought in at ridiculously low cap rates, terrifyingly high price/psf basis, and not fully understanding the ramifications and true cost (and time) of losing a tenant in a down market.
Frankly, it was crazy to buy virtually any retail building in Silicon Valley over the past few years. Investors and owners were so bullish that they would not sell at any cost. In one instance a user we represented attempted to buy a building on the peninsula in a mid-market location for a 5% cap on market rents (at the time – they are lower now), and was rebuffed by the seller because they “were not sellers at that price”. Since then, that tenant has been taken over by the FDIC and the value of the property has likely fallen by some 50% or more from what was offered.
You have to know when to hold them, and when to fold them, and many investors simply didn’t understand that when investors are acquiring property at 4-6% cap rates on market income that is historically high, without taking any reserve or vacancy losses, it’s generally time to fold ‘em.
- Detached From Reality
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- Q3 2009 Update: Silicon Valley Rents, Vacancy Rate, and Unemployment Numbers
- Retail Woes Push Vacancy Rates Up