Retail Fundamentals Look Solid for Second Half 2008


July/August 2008

By Lynn Novelli – National Association of Real Estate Investment Trusts

While some REIT sectors more than others reveal signs of the economic slowdown, retail REITs are heading into the second half of 2008 with their fundamentals still on solid ground.

The sector is largely unaffected in the short-term by changes in consumer confidence and spending, both of which have been slowly receding since last summer. “Retailing is a constant,” says Wachovia Securities Equity Analyst Jeff Donnelly. “The average lease is four to seven years, and there are still positive earnings. Retailers are still paying the rent.”

Retailers are paying the rent, but they are shopping for bargains. This represents a role reversal compared with the scenario in recent years, Donnelly notes. “In the past two years, retail REITs have benefited from being able to push rents,” he says. “This year, they cannot be as aggressive as leases expire.”

On the contrary, retailers are emboldened by current conditions and asking for significant discounts on rent, reports RBC Capital Markets senior analyst Richard Moore. “They always ask, but this year, they are asking for larger reductions. So far, they aren’t getting them. Landlords are holding firm.”

At some centers, sales are still healthy. Retailers have much less negotiating leverage at centers with strong sales volumes. Property owners are not going to offer meaningful rent concessions, according to Deutsche Bank senior real estate analyst Louis Taylor. “Retail sales levels today are much higher than they were 10 years ago when most of expiring leases were originally signed. As a result, rents on those locations will increase,” he says. Rents on leases signed in 2008 should be able to grow at an acceptable rate for the rest of the year, although growth will be somewhat stronger for regional mall REITs than for shopping centers. He predicts rents on leases this year will be 15 percent to 20 percent higher than the expiring rents for mall REITs.



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