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Retail Market Analysis
Retail fundamentals continue
to deteriorate in 2Q
John Perry
Research Analyst
(+1) 212 250-4912
john.perry@db.com
Vin Chao, CFA
Research Associate
(+1) 212 250-6799
vincent.chao@db.com
Conor Fennerty
Research Associate
(+1) 212 250-1576
conor.fennerty@db.com
Negative absorption keeps downward pressure on rents in 2Q
With additional store closures and downsizing in 2Q, -4.5 msf of space came back
to the national retail markets. This pushed vacancy higher, up 50bps sequentially
to 8.3% and pushed rents lower, down -0.4% sequentially. Year-over-year, rents
were down -3.2%. We expect the fundamentals will remain soft through 2010
which will result in further erosion in core metrics going forward.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
Industry Update
Global Markets Research Company
Approximately 4.5msf of space back in the market
This is the sixth consecutive quarter of negative absorption and the worst quarter
so far. During 2Q09, Houston had the best absorption (+351ksf), followed by
Phoenix (+206ksf) and San Francisco (+37ksf). Atlanta had the highest negative
absorption (-1.0msf), followed by Philadelphia (-595ksf) and Baltimore (-498ksf). On
a trailing 12-month basis, Houston again had the highest absorption (+333ksf)
followed by San Francisco (+141ksf) and Austin (+99ksf).
Vacancy rate increases 50bps to 8.3%
The vacancy rate increased 50bps sequentially to 8.3% in the top 24 metros we
track. Year-over-year, it was up 170bps. This is the sixth consecutive quarter of
vacancy increases. The vacancy rate in the 76 metros that REIS tracks, ended
2Q09 at 10.0% (see Figure 4). This is the highest quarterly level in our database
that dates back to 1Q00, and highlights the severity of the current recession,
which has led to bankruptcies, downsizing and widespread store closures (see
Figure 7). On an annual basis, retail vacancy peaked in 1990 at 11.1% and was
over 10% from 1987 through 1992. In 2Q09, San Francisco which had the lowest
vacancy rate, also had the biggest sequential decline in vacancy, down 40bps to
3.3%. Year-over-year, it fell 70bps. On a relative basis, the California metros have
the lowest vacancy rates (see Figure 5). Houston followed with a sequential
vacancy decline of 30bps to 13.2%, though year-over-year vacancy is up 70bps.
Rents fell 3.2% year-over-year and -0.4% sequentially in the top 24 metros
Year-over-year rent growth further eroded, at -3.2% in 2Q09 versus -2.6% in
1Q09. In 2Q09, only one metro (Austin) recorded a year-over-year increase in rent
growth. However, this was modest at +0.1%. Sequentially, rents were down
0.4% which compares to -1.7% last quarter.
Construction continues to shrink
At the end of 2Q09, 48.2msf of projects were under construction. This
represented 4.7% of inventory versus 56.0msf (5.5% of inventory) last quarter.
During 2Q09, projects totaling 11.1msf were delivered, with 3.3msf of starts.
Roughly 75% of these projects are expected to come online through 1H10.
Valuation and Risk
Our target prices are based on our forward enterprise value in 3Q10 at what we
believe are appropriate cap rates. Our cap rate assumptions are based off private
market transactions and our assessment of asset quality. Our estimates and
valuation are also subject to the risks associated with the weak retail environment
and with owning real estate stocks, such as job and population growth, interest
rate fluctuations, and sector rotation.
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