Retailers Cautiously Eyeing Expansion Into More U.S. Markets as Shopping Activity Rises

CoStar Forecast Predicts A Couple More Years Of Flat Absorption As Supply of Shopping Center Space Remains In Sync With Demand

However, the expected moderate demand for shopping center space should stay in check with the very low levels of new supply expected over the next couple of years, according to the report presented by Senior Real Estate Strategist Suzanne Mulvee and Real Estate Economist Ryan McCullough.

"Its been a long slog for the last couple of years, but the retail market is getting healthier from a fundamentals standpoint," McCullough said in a recent presentation. "Were not seeing a lot of dynamic demand and absorption in retail today, but were also not seeing the [development] that got out of hand during the last cycle."

The modest absorption figures mask the deeper story of a retail market divided into haves and have-nots. With little new retail space under construction, centers blessed with strong demographics in constrained urban areas are likely to lease up quickly, while properties in less desirable areas will experience difficulty filling their vacancy holes, McCullough said.

Theres hope that the recovery is broadening, however, with retail chains starting to shed their aversion to risk and look beyond the safest areas in hopes of getting ahead of the growth curve over the last year in western and southern metros, where housing bust markets such as Phoenix, Las Vegas and South Florida are again showing signs of life.

The U.S. retail market recorded about 10 million square feet of absorption in the first quarter, a low level compared with the same point in past recoveries, especially given the limited new supply and strong rebound in retail sales over the last two years, McCullough said.

One reason for the modest absorption in recent quarters is that demand has slackened for space in power centers, by far the strongest sector in retail emerging from the Great Recession. While malls, strip centers, community centers and neighborhood shopping centers have consistent trailed power center, traditional anchors like Kmart and Best Buy are repositioning their stores in light of rising competition from Internet sales and other changes in buying patterns.

CoStar forecasts that power center demand will remain flat for 2012 as store closures and downsizings by some retailers partially offset the growing number of store chains that are aggressively expanding their footprints. Chains such as Kmart, Best Buy and OfficeMax are returning an estimated several million square feet of store space to the market through closures in 2012.

Many other leading chains, however, such as Wal-Mart, Dicks Sporting Goods, Target and Burlington Coat Factory, are aggressively leasing up space to take advantage of attractive rents at the trough of the market. Larger stores like Best Buy are shrinking their footprints to fit urban infill centers, while other fast-growing chains like Ross, Marshalls and Burkes Outlet take advantage of the lower rents to expand into larger spaces.

Another trend in recent years has been the emergence of outlet centers as a rival to regional malls. Even as vacancies in outlets have trended higher than either malls or power centers since mid-2010, however, publicly traded and private operators continue to compete for a share in the outlet space, headed by the worlds largest mall operator, Simon Property Group (NYSE: SPG).

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Retailers Cautiously Eyeing Expansion Into More U.S. Markets as Shopping Activity Rises