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CRE May 2010

REALTY CHECK:

Twists, turns expected for retail market

By John Restrepo, Principal, with Maria Guideng, Economic Researcher, Restrepo Consulting Group LLC

Click to enlarge photo

John Restrepo

While the Las Vegas Valley’s (“the valley”) economy, especially the job market, continues to struggle, and the recovery is likely to be slow, there are growing signs we may be have reached a bottom. May is the operative word here. As a result, the turmoil experienced last year in the valley’s anchored retail market seems to be abating.

As we noted in last year’ retail article, Las Vegas’ anchored market was one of the most vibrant and strongest in the nation for many years. The housing market crash, combined with the drop in consumer confidence and spending, because of mayhem in the job market, caused the region’s anchored retail centers to experience rapidly rising vacancy rates and declining rents. So where is the valley’s anchored market headed in 2010? Let’s look at some of the national indicators since they have a significant impact on the health of our tourism-based economy.

Consumer Confidence Index

The Conference Board’s Consumer Confidence Index continued its gradual upward trend to 57.9 in April, the highest recorded since September 2008, as respondents anticipated improvements in job availability. From its recent record low 25.3 in February 2009, the index has risen 115%, indicating that consumers nationwide are starting to feel more optimistic.

Real Consumer Spending, Disposable Income and Savings

Real consumer spending — spending adjusted for price changes — increased 0.3% in February, a slight improvement from the 0.2% gain in January. The preliminary estimate released by the U.S. Commerce Department reports consumption in the first quarter rose at its fastest pace in three years, driving three consecutive quarters of positive economic growth. Meanwhile, real disposable personal income — income after taxes adjusted for inflation — was flat in February, after dropping -0.4% in January. Income levels appear to have stabilized when compared to the first half of 2009.

The rise in spending pushed the personal savings rate down to 3.1% in February 2010. The average monthly rate was 4.3% for the 12 months ending in February. In comparison, the rate was 3.1% for the same period in 2008-09. The average between 1995 and 2009 was 3.4%. If consumers are moving back to their long term and relatively low rate of savings, this bodes well for retailers. However, one can argue whether this would good for the overall health of the economy.

Clark County Taxable Retai Sales and Employment

At the local level, establishment-based employment in Clark County declined 6% when comparing February 2010 to February 2009, while retail sales declined by 5%. However, there has been a noteworthy “decline in the rate of decline” for both indicators when comparing them to the same months in the previous year. Specifically, employment decreased by 7.7% when comparing February 2008 to February 2009, while taxable retail sales plunged by 19.6%. That said, the average monthly change for the 12 months ending this February was -15.8% for taxable sales and -9.4% for employment. The comparable numbers for 2008-09 were -6.9% and -2.9%. That the data are mixed is not surprising; since this is what this recovery is all about — fits and starts. That is why one national analyst famously said the recovery is one “that only a statistician can love.”

Finally, it’s no surprise that the trajectories of both indicators are similar, with employment being the driver. The trend for the last four months point to an improved 2010 compared 2009, but it will still be a tough year for the retail industry and consumers.

Las Vegas Valley Anchored Retail Market

The valley’s anchored retail market remains challenged principally by the significant job losses at the local level and but also by constrained tourism spending. Let’s take a look at the major retail market indicators we track.

Retail Space and Vacancy

Our research shows the valley closed Q1, 2010 with an anchored retail inventory of over 43.1 million square feet (“sf”) in 265 shopping centers. Of this amount, 4.4 million sf stood vacant, resulting in a vacancy rate (direct) of 10.2% at the end of Q1, 2010. The vacancy rate was 7.8% at the end of Q1, 2009. It’s startling that the Las Vegas Valley’s anchored retail vacancy rate has spiked by nearly 300% since Q1, 2007 when vacancy stood at a constrained 2.7%.

Supply and Demand

The ongoing rise in retail vacancies continues to be driven by weak absorption, rather than new space entering the market. There were no anchored center completions in Q1, 2010. However, there were 957,400 sf of completions during the past 4 quarters ending in Q1, 2010. In comparison, we recorded 1.2 million sf of completions between Q2, 2008 and Q1, 2009.

We expect very little in regards to construction over the next several years. This bodes well for the retail market and will play a critical role in helping to shorten the recovery timeline needed to absorb the 4.4 million sf of vacant space.

At its peak, leasing was at a record high with 1.2 million sf of space absorbed (just short of completions: 1.4 million). Since then, retail tenant demand has continued to drop with the last 4 quarters seeing net absorption of -268,000 sf. The good news is that absorption during the previous 4 quarters was -645,000. So, again, we have an improvement in the rate of decline – a very welcome improvement.

Retail Space and Rents

Anchored retail rents reported by RCG are based on information provided by owners and brokers about available vacant space in specific projects. Las Vegas recorded an average monthly retail rent of $1.64 per-square-foot NNN (“psf”) at the end of Q1, 2010, comparable to Q4, 2009 and down by -14% from Q1, 2009. The change between Q1, 2008 and Q1, 2009 was -11.2%. The peak rent during the last 13 quarters occurred in Q3, 2007 at $2.25/sf, putting Q1, 2010 27% below the peak. It is clear that rents continue to be a boon to tenants and a bane to owners, including banks.

2010 and Beyond

The recent improvements seen in consumer confidence levels nationwide is encouraging, however recovery is inexorably tied to employment conditions, which is then linked to income and consumer spending. The long awaited improvement in the most important and critical indicator – job creation – is emerging at the national level. Yet, major challenges remain for Southern Nevada, because the national recovery remains tenuous at least through 2010. Whether this will lead to a ramp up in hiring like was seen after the last several recessions remains unanswered.

It is our opinion that the historical spike in job creation seen after the last several recessions ended will not be seen this time. The national indicators continue to point to significant improvements in worker productivity.

This means that many companies around the country are “doing more with less” in terms of hiring, and we see no reason why local companies won’t follow suit. And the prerequisites for a strong recovery are stable housing prices, which we are seeing, and strong hiring, which we are not seeing. Both are needed to reverse the massive job losses Southern Nevada has experienced, because of the Great Recession.

Secondly, we now know that the most recent economic boom had as one of its fundamental drivers cheap and easy credit, a situation that was great for the retail industry while it lasted, but a situation that is not likely to be repeated any time soon.

Consumers and businesses must “deleverage” first. In the mean time, we expect that the valley’s retail market will have to claw its way back to growing again, rather than recovering quickly from massive spending.

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