Cassidy Turley, a leading commercial real estate services provider in the U.S., reports the first vacancy declines for the U.S. retail sector in five years as the market's recovery gains momentum.

Cassidy Turley's May 2012 U.S. Retail Report notes that in the first quarter of 2012, the retail sector absorbed 3.1 million square feet, following a pace of 3.4 million square feet in the previous quarter. The pace over the last six months is five times faster than any point in the recovery cycle.


Further, vacancy fell 10 basis points to 10.9%, the first decline in five years. Average asking rents, which have fluctuated in the past year, increased slightly in the first quarter of 2012 to $19.00 per square foot. Markets with the highest percentage rental growth include Austin at 3.4%, Charlotte at 2.9%, Oakland-East Bay at 2.7%, and San Jose and Seattle at 2.6%. Manhattan claims the top per-square-foot rate with an average asking rent of $56.96.

Still, the sector has a long way to go to reach full recovery, Cassidy Turley Chief Economist Kevin Thorpe said.

“We may have a long way to go to reach what's considered full recovery, but the U.S. retail sector also has made tremendous strides from our depths,” Mr. Thorpe said. “The U.S. retail sector is on pace to absorb 12.4 million square feet in 2012 – equal to about half the pace of 2006 and 2007 – and the latest data confirms that the uptrend in retail is clear, consistent and accelerating, all of which is good news.”

While top-line numbers signal broad improvement, Cassidy Turley's May Retail Report points to a sector that's highly bifurcated. First-tier shopping centers – those in vibrant urban markets or top suburban intersections or trade corridors – are posting marked improvement, with the highest rate of deal activity and, in most cases, rental-rate growth. Second-tier locations – shopping centers lacking strong anchors or not “on the main drag” – in the nation's strongest market are generally posting rent growth as well, but this is not replicated in weaker markets. Third-tier shopping centers face challenges in nearly every market, according to the report.

More broadly, a healthier U.S. economy will continue to boost the retail sector. Expectations for GDP growth are in the 2 to 3% range, and the odds of the U.S. economy slipping back into recession are 1 in 4. The U.S. household debt service ratio stands at 10.8%, a level that suggests both borrowing and spending will pick up, a trend already confirmed by year-to-year growth rate of 6 to 7% thus far in 2012. Perhaps most encouraging, consumer confidence is holding steady.

“Even when gas prices rose to nearly $4 per gallon in April, the Conference Board's CCI held steady,” Mr. Thorpe said. “When gas prices spiked last year, confidence plunged, so it appears as though it will take a lot more to rattle consumers this year.”

That said, the middle-class U.S. consumer will continue to embrace the “new frugality” that analysts began discussing in 2008, which bodes well for most warehouse stores, discounters, grocers and drug stores and their expansion plans.

“We don't see the middle-class consumer returning to its old spending patterns, much less the credit-fueled 'aspirational shopping' of the mid-2000s, for a number of years,” Mr. Thorpe said. “This simply is not going to happen until the housing market recovers and much of the equity lost in the downturn is restored. In some markets, this could be a decade off.”

Among the top trends to watch in 2012, Cassidy Turley's U.S. Retail Report predicts:

  • Retailers chasing the sure thing – high-density, high-income, low-unemployment demographics. 

  • With rare exception, there are no new rooftops to follow. New development in 2012 will largely be limited to urban redevelopment projects. Only a handful of metros will see new suburban projects go forward this year. 

  • Retailers are downsizing. Big-box users are shrinking their footprint, but the same applies to a number of smaller-space users and restaurant chains as well. 

  • Continued massive grocery expansion, but industry shakeout as well 

  • Increased M&A activity. 

  • The lion's share of retail failures and bankruptcies in 2012 will be for mid-priced retailers, but the amount of space returned to the market will be considerably less than 2011. Closures will disproportionately impact Class B and C malls. 

  • Market for shop space remains challenged by a lack of smaller-space users in expansion mode. 

  • Top growth concepts for 2012 – automotive, discounters, dollar stores, off-price apparel, pet supplies, sporting goods, fitness/health/spa/massage concepts, drug stores and grocery stores.

About Cassidy Turley
Cassidy Turley is a leading commercial real estate services provider with more than 3,600 professionals in more than 60 offices nationwide. The company represents a wide range of clients-from small businesses to Fortune 500 companies, from local non-profits to major institutions. The firm completed transactions valued at $22 billion in 2011, manages 455 million square feet on behalf of institutional, corporate and private clients and supports more than 28,000 domestic corporate services locations.