The retail property market is at the top of its game in terms of both leasing and investment. Consumers have carried not only the retail market, but the entire economy through the recession of 2001 and the jobless recovery of 2002 and 2003.Atlanta tops the list of retail markets that are likely to generate the strongest investment returns over the next five years, thanks to a rapidly growing household base. With the exception of Washington, DC, eight of the remaining markets in the top 10 list are in the West or Southwest (including Texas), indicating the importance of dynamic population growth to retailers.
Retail sales in Canada grew modestly in 2003 providing support for the retail property sector. Enclosed malls continued their strong performance in major cities; in secondary provincial markets, they have to work harder to retain tenants, particularly in communities with new power center developments. Street- front retail is experiencing a resurgence in shopper popularity and tenant demand, pushing up rental rates on premier fashion streets, especially in Toronto and Vancouver. Demand for retail investment product remains strong among retail-focused institutional funds for the higher-valued property and among private investors for the moderate-valued assets. Capitalization rates range from 8.0 percent in primary markets to 11.5 percent in secondary ones, with yields lower on high-end fashion streets.
Mexico’s retail construction volume remained strong in 2003, a pattern encouraged by relatively tight occupancy levels, which hovered around 5 percent or less during the last half of the year. Base rents remained steady. Trends include escalating land prices with a growing number of land leases and partnering arrangements. Large, older and often empty boxes have become attractive to call centers. In South America, a lackluster economy and high interest rates, particularly in Brazil, will subdue development in 2004. But large US retailers continue to target South America for expansion in the right locations. The influx of retail giants like Wal-Mart, JC Penney, Home Depot and Starbucks will persist. In addition, fast food chains, clothiers and convenience stores are maintaining a steady stream of activity in the region.
Low interest rates and sustained household consumption growth have maintained strong demand for retail space during 2003 and consequently rental levels have moderately increased in some European markets. Although consumer expenditure growth has slowed significantly, the retail sector has continued to out-perform both office and industrial sectors.