SOUTHEAST SNAPSHOT, JUNE 2009

Charlotte Retail Market

Vacancy in Charlotte retail properties will continue to rise through the end of this year as employment losses and a weak single-family housing market weigh on consumer confidence. Nearly 26,000 jobs were eliminated in the metro area during the first quarter, and additional cuts are expected in the next 2 quarters. The pace of reductions may slow from the loss of 10,000 positions in February, however, as the market’s large banking industry stabilizes. In addition to a weakened local employment base, home buying activity within Charlotte’s single-family segment is at levels last achieved in 1996. Homes are currently taking more than 6 months to sell, and the median price has dropped to a 5-year low. Consumers are curtailing spending as a result of slumping velocity and reduced home prices. Retail sales have fallen 12 percent during the past year, and, consequently, there has been an increase in closures of small, locally based retailers in shopping centers. Construction of new space continues to decelerate, which will help offset some of the reduction in space demand this year.

Second-quarter numbers indicate that marketwide employment is on pace to decline by 38,000 jobs in 2009, a 4.5 percent loss. Last year, 28,500 positions were eliminated. In construction, approximately 1.6 million square feet of space was delivered in 2008. This is expected to recede this year to 1.2 million square feet. One-third of the construction activity will be in the North submarket, where residential building remains strong. The increase in retail property inventory will offset softer tenant demand, yielding a 220 basis point rise in the vacancy rate to 10.3 percent. In 2008, vacancy pushed up 150 basis points. Asking rents are expected to drop 3.8 percent to $17.37 per square foot, while effective rents will fall 4.7 percent to $15.35 per square foot. Last year, asking rents rose 0.7 percent, and effective rents declined 0.7 percent.

Retail investment activity will remain limited in the near term due to ongoing uncertainty in the market. Buyers continue to focus on single-tenant properties with credit tenants, while concern over the stability of noncredit occupants recently caused velocity for multi-tenant assets to come to a standstill. In fact, multi-tenant property sales were quite scarce in the first quarter. Owners of neighborhood shopping centers who are considering selling are doing so because they see an opportunity to trade up in lease terms. Currently, cap rates for Class A assets average in the high- 7 percent range, up about 50 basis points from 1 year ago, while initial yields for Class B and Class C properties are in the mid- to high-8 percent range, a year-over-year rise of around 75 basis points. Single-tenant properties continue to sell, particularly credit-tenant fast-food assets and drugstores, which are expected to outperform other property types during the recession.

 — Gary R. Lucas is a senior vice president and managing director of Marcus & Millichap Real Estate Investment Services. He is also the regional manager of the firm’s Charlotte office.

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