The chart below is interesting to me. It shows the best and worst retail markets in terms of vacancy. The markets with the highest vacancy are no surprise; however, the markets with the lowest vacancy rates show a couple of cities that I would have thought would be in the other column. With all of the doom and gloom coverage of Las Vegas these days, I am surprised to see Las Vegas showing up in a positive light in any publication. Miami, Florida is the other city I would not have expected to be on the list of cities with the lowest retail vacancy. Nashville, TN and Salt lake City, UT seem a bit curious as well but I don’t claim to know anything about these markets. It is good to see my home market (Orange County, CA) coming in at #4. I’m sure the numbers for many of the cities will be increasing over the next couple quarters. I’d love to see rent rolls for a few centers in Detroit. So much for a 5% vacancy factor and 3% reserves! Developers in Detroit must have to build an extra 20,000 square feet for every 80,000 square feet they plan to lease and capitalize. I can just see the marketing brochures – buy an 80,000 square foot center and get a 20,000 square foot center for free!
The full article discussing the fundamentals of the nation retail market can be found here.
8 comments
anon says:
March 23, 2009 at 11:28 pm (UTC -8)
I am really surprised that the Inland Empire and metro Phoenix did not make the most-vacant top 10. Both have vacancy rates in the very high teens.
I generally agree with your comments about pricing inefficiencies in the CRE market. However, from a seller's perspective, if the property is cash-flow neutral (after mortgage expenses), why try to sell at a 50% discount in anticipation of things getting much worse ? Why not ride out the storm ?
Chris Rodriguez says:
March 23, 2009 at 11:40 pm (UTC -8)
I was surprised to not see the Inland Empire and Phoenix as well. I think both are only going to get worse from here.
I agree that you should ride out the storm if you can. That does not change the fact that the true value of the asset should and will be reduced during that timeframe. You only realize the reduction in value if you sell. My point was that there are many people trying to sell but not facing the fact that their value has been reduced more than just a half point or so in capitalization rate.
Chris
anon says:
March 25, 2009 at 12:52 am (UTC -8)
Agreed. If the property were "marked to market", the discount (both due to a much increased cap-rate, and much lower rental receipts/vacancies) is incredible. Conservative estimates are that cap-rates are up by 200 basis points (6->8%), lets tack 200 additional basis points to that. So that is a 40% discount on the cap rate alone. Throw in another 20-30% in lost income from vacancies, reduced rents etc, the property value is now tanking 50-60% of the 2005-2006 peaks. Now lets say the property is conservatively financed (60% ltv), a 50% drop in value means your equity is wiped out. Further, from the bank's perspective, the loan is already 10+% underwater. Would that qualify as a toxic asset on the bank's balance-sheet ? Would the bank trigger a foreclosure, even if the property has sufficient rental income to meet expenses, and make the mortgage payment ? I don't know how the dynamics work in a case like this, the US has never been in a situation like this since the great depression (maybe ever). Do both the bank & the property owner(s) stay in a holding pattern hoping that things better before they get much worse ? What could break the cycle ?
1) Consumption
2) business investment
3) federal spending (would this crowd out 1,2 ?)
4) net exports (rest of the world is in much worse shape)
You need banks to lend to help with 1,2. Banks will not lend till the toxic assets are off their sheets. Assets will continue to stay toxic until foreclosures stop, and consumption/investment picks up. That seems like a cycle to me, with only the government being able to break it by buying the toxic assets (either directly, or with some type of private placement as the latest Geithner plan suggests). I think the government is on the right track here, though many disagree, yet even if the plan works, it is not going to come for free. The exact macro-economic impacts are unknowable at this time.
I wonder if the earlier S&L crisis had the same characteristics as the above situation, or if this is something entirely new.
Chris Rodriguez says:
March 25, 2009 at 1:12 am (UTC -8)
Good analysis. I agree with you that a cycle is developing and some sort of intervention is needed to stop it.
I would be interested in having you write a guest post if you were interested. Let me know.
Chris
Michael M says:
May 25, 2009 at 10:23 pm (UTC -8)
Hmmm…. Going back to the article and the stats you listed, and comparing it to the NAR's commercial RCA forecast for Winter 2009 (see link to PDF below), they're predicting that retail markets will improve significantly in some of the cities your post cites as those with lowest vacancy rates (San Fran, LA, OC, etc.).
If the vacancy rates are already low in these markets, would a major improvement NOT be likely, despite what their report suggests? It seems to me that when the turnaround comes, the markets that have been hit the hardest would show the most marked improvement… there's just so much more room to grow.
At any rate, I think the most important question to ask here is this: How does one prepare to take advantage of the current and coming circumstances (depending on which report you believe)?
Link to the PDF file on Realtor.org: (http://www.realtor.org/wps/wcm/connect/3d3796004d...
P.S. Sorry for the ugly link.
krishna says:
July 8, 2009 at 7:23 am (UTC -8)
Hey very interesting chart.
Thanks for posting, it was very helpful.
Idaho Real Estate
krishna says:
July 8, 2009 at 7:23 am (UTC -8)
Hey very interesting chart.
Thanks for posting, it was very helpful.
Idaho Real Estate
mortgage home owner says:
March 4, 2010 at 3:02 pm (UTC -8)
The cities with the lowest vacancies easily show that there are jobs going there so need the housing for those workers to live from. Also some of the cities there are cities with money back behind then and able to lend money and possibly even not been hit as hard during the financial crisis.