Real estate investors surveyed by PwC US for its second quarter 2012 report expect that weak consumer spending and large vacancy overhang will continue to hamper recovery in the retail sector.
At mid-year 2012, a significant percentage of PwC’s survey respondents continued to be sufficiently concerned about retaining existing tenants and attracting new ones to offer several months of free rent in a bid to keep their center occupancies at current levels. Approximately 50 percent of regional mall owners who participated in the survey indicated they were using free rent to retain tenants, for an average period of four months. At power centers, average period of free rent totaled 4.9 months, with 42.9 percent of respondents indicating they were using the tactic. Almost 82 percent of respondents reported they were using free rent at shopping centers, with the average period lasting 3.9 months.
In fact, the retail sector remains in the recession cycle, PwC reports, with full-steam recovery not expected until year-end 2014.
Investors, particularly REITs and institutions, are still expressing strong interest in buying retail assets, the survey found, but average cap rates in the sector are no longer compressing as rapidly as they did last year. In the second quarter, average cap rates for regional malls and shopping centers remained flat with the quarter prior, at 7.23 percent and 7.18 percent respectively. Average cap rates for power centers declined slightly, by 18 basis points, to 7.14 percent.
In fact, the investment sales activity pattern in the second half of 2012 might resemble the pattern the industry witnessed in 2011, with an extremely strong beginning of the year followed by subdued activity in the second half, according to the most recent report from Real Capital Analytics (RCA), a New York City-based research firm.
In May, the most recent month for which data is available, sales of retail properties totaled approximately $4.4 billion, showing no increase from the same period a year earlier, according to RCA. RCA researchers expect that total sales volume for the second quarter of 2012 will be lower than in the first quarter because of a number of large portfolio sales that took place at the beginning of the year, including Westfield’s sale of seven U.S. malls to Starwood Capital Group and Blackstone/DDR’s purchase of 46 shopping centers from EPN Group.
In May, some of the largest retail trades involved publicly traded REITs, such as Glimcher Realty Trust’s $362 million acquisition of Pearlridge Center in Aiea, Hawaii from the Blackstone Group, Kimco Realty Corp.’s $181 million acquisition of Towson Marketplace in Towson, Md. from DRA Advisors and CBL & Associates’ acquisition of Dakota Square Mall in Minot, N.D. from the Lightstone Group for approximately $91.5 million.
The average cap rate on all retail transactions was 7.3 percent, RCA reports.