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CRE Finance World, Summer 2012

Rising Online Sales Could Keep Retail Vacancies Elevated Our regression estimate is: Vacancies May Remain High Even if the Economy Improves Retail sales for both brick-and-mortar and online stores rely heavily Retail vacancy rate (%) = 3.23 + 0.59*(online sales/retail on the state of the economy. If the currently high unemployment sales, lagged by one year %) + 0.73*(unemployment rate rate were to improve, we believe it could spur an increase in con- %) + 0.03*(Year-over-year growth in retail construction, sumer spending, which would offset some of the reduced demand lagged by three years %) for retail space from increasing Internet sales. In our estimate, a 2 percentage point fall in the unemployment rate would reduce the Our regression parameters are: vacancy rate by 1.4 percentage points. t-statistics: intercept (12.7), online sales (7.6), unemployment An improving economy could also lead to more construction. Our (12.6), and construction (3.3) equation estimates that a 20% rise in retail construction starts would lead to a 0.6 percentage point increase in the retail vacancy Time period: 2000 Q4 – 2011 Q4 rate after three years. Observations: 45 However, increasing online sales are likely to keep the retail vacancy rate high even if the economy continues to exhibit mod- Adjusted R-squared: 0.96 est growth. We project a retail vacancy rate of near 12% through 2015, assuming the unemployment rate drops to 6.7% (our Data sources: the U.S. Department of Commerce for retail sales and economist’s forecast for 2015), the share of online sales grows at Internet sales, Bureau of Labor Statistics (BLS) for unemployment a slightly faster pace (0.5% per year), and construction remains at and construction, and CBRE-EA for vacancy rates. current levels (see chart 2 and table 1). The coefficients are all statistically significant and of the expected sign. Chart 2 Retail Vacancy Rate, 2000-2015 (projected) Our results indicated that a 1% increase in the percentage of on- line sales would lead to a 0.6% increase in the retail vacancy rate. We expect online sales to double over the next 10 years to 10% of all retail sales. Under this outcome, our regression forecasts a vacancy rate of 6 percentage points above what it would otherwise be if Internet sales were nonexistent and 3 percentage points higher if the percentage of Internet sales remained stable. According to CBRE-EA, an average of nearly 3 billion sq. ft. of retail space will be in place from 2011-2016. A 3 percentage point increase in the vacancy rate translates into 90 million sq. ft. of empty space over the next 10 years. To put that figure into perspective, the combined size of the 50 largest malls in the U.S. is less than 100 million sq. ft., according to the International Council of Shopping Centers. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 29


CRE Finance World, Summer 2012
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