The retail sector is in contraction, fueled by the recession,
mounting job losses and a sharp drop in consumer spending. Retail
businesses are scaling back operations, closing stores and trimming
demand for space. Adding to the situation, some retail companies-like
Circuit City-are filing for bankruptcy and closing stores. With rising
vacancies, declining rent growth and debt maturities looming, investors
are on the sidelines.

The wait-and-see attitude was amply illustrated by the 2008
investment volume-at $19.4 billion, the lowest of the four core
property types. On a yearly basis, the 2008 retail transaction volume
dropped 74 percent from 2007. Transaction numbers were down 60 percent,
at 1,649 property sales. Average cap rates moved up 60 basis points
through the year, accelerating in the fourth quarter. Meanwhile, prices
entered negative territory.

Regionally, on a year-over-year basis, the greatest declines in retail transactions were seen in the following markets:

  • The Mid-Atlantic down 80.1 percent
  • The Southeast down 79.6 percent
  • The West down 69.2 percent
  • The Midwest down 66.4 percent
  • The Southwest down 66.1 percent
  • The Northeast down 54.9 percent

Comparing the two retail property types-strip centers and mall/other
properties-reveals similar declines. During 2008, $10.4 billion of
strip centers traded hands. The figure represents a 76 percent decline
year-over-year. In addition, the number of strip property transactions
also fell 72 percent, to 699. For the better part of the year, the
number of strip centers offered for sale exceeded the number of deals
closed. Pricing rose through the early part of 2008, but dropped in the
last quarter, to settle on a two percent rise for the year. Looking at
strip centers nationally, only one market avoided the decline in
investment-San Jose, CA, which at $204 million in 2008 transactions was
even with the 2007 volume. On the flip side, DC posted a 100 percent
drop in transaction volume, followed by Pittsburgh (-95%), Columbus
(-94%), and Tampa (-92%).

Mall and other retail property investments fell at a comparable rate
during 2008-71 percent, with a total volume for the year of $9.0
billion. The number of mall and other properties traded fell 42
percent, to 950. The regional mall fared the worst in the year's
investment activity-only 20 properties traded hands in 2008, for a
total value of $1 billion. The average price per square foot recorded
the same two percent increase for the year as the strip centers. Urban
mall properties witnessed a strong start to the year, but by the end of
2008, affluent customers and foreign tourists alike put the brakes on
spending, leading to declines in the malls' performance and investment
attractiveness. Regionally, there were a few metro areas that attracted
an elevated pace of mall investment activity in 2008. Chicago witnessed
a 100 percent jump in the volume of investments during the year. The
second highest rise in mall investment volume occurred in Las Vegas,
where $335 million exchanged hands during the year, an 82 percent
increase. Other metros with positive changes in investment volume were
Charlotte (19%), Jacksonville (17%), Manhattan (9%), and DC/Maryland
suburbs (7%).

Judging by volume of retail investments, Chicago took the top spot
in 2008, with $1.7 billion in sales. The second market by volume was
Manhattan, with $1.3 billion in retail transactions. Underscoring the
change in the economy, these were the only two markets to post over $1
billion in retail investment during 2008, compared with 15 markets in
2007. The other markets rounding the top five by investment volume were
Los Angeles ($744 million), Houston ($707 million) and Atlanta ($561

Considering the buyer composition for retail space, foreign
investment dropped by 99 percent on a yearly basis. Public and equity
investors also pulled back investments by 93 percent and 75 percent,
respectively. Consequently, the retail market has undergone shifts in
market share. Private and institutional investors gained the most
market share, with increases of 10 percent and 7 percent, respectively.


The top retail deals of 2008 include:

  • 666 Fifth (Retail Condo), New York, NY (Mall/Other) - $525.0 million
  • Westfield North Bridge, Chicago, IL (Mall/Other) - $515.0 million
  • 730 N Michigan Ave, Chicago, IL (Mall/Other) - $350.0 million
  • Shoppes at The Palazzo, Las Vegas, NV (Mall/Other) - $290.8 million
  • Bay Street Emeryville, Emeryville, CA (Strip) - $234.0 million

The retail sector's performance in 2008 left investors wondering
what 2009 will bring. Based on the fundamentals, the year ahead is not
likely to bring much good news. While retail completions in 2008 were
down by nine percent compared with 2007, existing retail space
continued to flood the market. In addition, net absorption of retail
space continues to drop, and is forecasted to end 2009 at a negative
49.8 million square feet. With negative rent growth on the horizon, it
remains to be seen what investors' appetite for retail space will be
this year.