Small Retail Store Rents Hit the Skids

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Rents at small retail properties are falling at the fastest clip since at least mid-decade as the recession pressures shopping center owners to try and retain independent retailers, according to the latest small-cap property market research from Boxwood Means, Inc. With rents tumbling 3.4% in first quarter and 9.3% year-on-year, many landlords are facing significant challenges in preventing stores from going dark. The sheer magnitude of these rent adjustments also suggests that a market bottom may be near.

Rents at small retail properties are falling at the fastest clip since at least mid-decade as the recession pressures shopping center owners to try and retain independent retailers. According to the latest small-cap property market research from Boxwood Means, Inc., national asking rents for small retail properties averaging 13,500 square feet plunged 1.2% in March and a whopping 3.4% in first quarter. Both the monthly and quarterly declines are the largest on record since Boxwood began tracking small-cap rents for 80+ U.S. markets in 2006. It suggests that, as overall retail rents have tumbled 9.3% since this period last year, small retail property owners are facing significant challenges in preventing stores from going dark.

The quarterly rent decline for small-cap retail is nearly the double the rate of loss reported elsewhere for larger and more institutional-quality shopping centers. Notwithstanding the well-publicized bankruptcies and store closings among major retailers, the larger centers typically enjoy a stable tenancy of regional and national stores. By contrast, owners of neighborhood shopping centers and small retail stores are more dependent on local businesses and home-grown retailers that usually don't have the same credit or staying power of larger tenants during deep recessions. As Randy Fuchs, Boxwood principal suggested, "The considerable and widespread rent reductions, especially over the last couple of months, reflect the tough leasing conditions at small neighborhood centers throughout the U.S. "

Among different retail property subtypes, rents for small street retail properties have dropped most precipitously. This follows as street retail stores, which command the highest average retail rents at $17.90 per sq. ft., offer more discretionary and higher-ticket goods and services - just the items that consumers have been cutting back on. These rents decreased 3.7% in first quarter including a loss of 1.3% in the month of March alone. For the past 12 months, rents are down a sizable 10.2%. This rent erosion has been relatively widespread, with the worst performers over the last quarter including Fort Myers, FL (-12.7%), Washington DC/Surburban MD-VA (-9.5%) and New York City (-9.2%).

National rents at small shopping centers are also weakening, albeit at a slightly slower pace. Shopping center rents, at $16.36 per sq. ft. on average, dropped 2.9% during first quarter and 8.6% year-on-year. Selected Florida and California markets recorded heavy quarterly losses including Melbourne/Palm Bay (-7.2%), Sarasota (-6.0%) and Sacramento (-5.3%).

The sheer magnitude of these rent pullbacks, especially in the ravaged housing markets of California and Florida, suggests that small-cap retail markets may soon be bottoming out.

Boxwood Means, Inc. (http://www.boxwoodmeans.com) is a Stamford, CT- based real estate research and consulting firm providing quantitatively-oriented solutions for the investment, valuation and risk management needs of a diverse base of real estate and investment firms in the U.S. and Canada. Boxwood compiles small commercial property statistics and trends for retail, office and industrial properties in over 80 U.S. metropolitan areas through its partnership with LoopNet, Inc.

Contact: Randy Fuchs, Principal
Telephone: 203-653-4100

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