The U.S. commercial property market will avoid the massive troubles crippling the single-family housing sector but will face hard times in the coming year, according to presenters at NAREIT’s annual REIT Week conference that took place in New York City from June 4 to June 6. Coming out of ICSC’s RECon show in Las Vegas in May, retail REIT executives said retailers were worried about sluggish consumer spending and continued to scale back store openings. Few, however, have asked for outright rent relief.
Overall, the market environment seems to be more stable than everyone feared, leading to predictions that the industry will weather a long, but mild recession.

Rising food and gas prices currently present the biggest challenge for shopping center operators, according to Milton Cooper, chairman and CEO of Kimco Realty Corp., a New Hyde Park, N.Y.-based shopping center REIT with a 120-million-square-foot portfolio. With gas costing more than $4 a gallon, U.S. consumers are cutting back on everything but the essentials. Even luxury retailers have started to feel the impact, said John Bucksbaum, chairman and CEO of General Growth Properties, Inc., a Chicago-based regional mall REIT with a 180-million-square-foot portfolio.

“In the past couple of years, everybody wanted to trade up,” Bucksbaum said describing the trend of middle-income consumers dabbling in the luxury sector. “Today, so many of those people are scaling back. It’s all at the margins, but it makes a big difference to the retailers.”

Despite the hit to consumers, most REIT executives reported that leasing activity during the RECon show remained healthy, though below last year’s robust levels. The retailers holding on right now include discounters, warehouse clubs and supermarkets, which are benefiting from inflation on food prices, according to Cooper. On the flip side, restaurants are hurting, said Craig Macnab, chairman and CEO of National Retail Properties, Inc., an Orlando-based REIT that owns approximately 10.6 million square feet in single-tenant retail assets.

This lackluster environment will likely last for another year or so, according to Kenneth Rosen, professor of real estate and urban economics at the University of California-Berkeley, who estimates the economy has entered a recession, but thinks there's a 50 percent it will remain mild. The wild card, however, is the price of oil. If that jumps significantly, all bets are off.

Despite the broader economic challenges, commercial real estate fundamentals remain solid in part because developers have scaled back on new projects, limiting the amount of new supply. That will provide a buffer against the kind of precipitous price declines experienced in the residential sector, Rosen said. However, there will at least be a modest drop in prices this year, he predicted.

In the past 12 months, cap rates on A-class retail assets have increased between 25 basis points and 50 basis points to approximately 6.5 percent, according to Kenneth Bernstein, president and CEO of Acadia Realty Trust, a White Plains, N.Y.-based shopping center REIT with an 8-million-square-foot portfolio. Cap rates on class-B and class-C assets have moved up 100 basis points, meanwhile, and may still go higher.

As a result of the slowdown in leasing and the difficulty of obtaining construction financing, most of the REITs are taking a more measured approach to new development. But the majority of REIT executives expect that they will be able to get through the current downturn unscathed.

“I am optimistic about the long range, we just have to be patient,” said Cooper. “I am very hopeful and optimistic that the market will change next year. Whoever is elected president, there will likely be an increase in taxes, which will be good for the dollar. And there will be a push to make America less dependent on oil."

--Elaine Misonzhnik