Minimal construction and large lease signings are expected to bring the retail vacancy rate in Columbus to a 5-year low this year. At the same time, investment activity should increase through year’s end, particularly in the multi-tenant retail segment, as investors take advantage of historically low interest rates.
Many of the leases in the Columbus metro area will be executed in areas with healthy population growth and established foot traffic, including Polaris, Easton, and Westerville. The lease inked by Menard Inc. for 240,000 square feet at the old Northland Mall last year will help revitalize the Morse Road corridor. Slightly north, elevated household incomes will bode well for Westerville, where Walmart will open by mid-year. Both moves will increase traffic within the area, while attracting smaller tenants to vacated inline space nearby.
Elsewhere, Earth Fare Inc. will move into 30,000 square feet at the Gemini Place Towne Center in Polaris, further solidifying the neighborhood as a top retail corridor in Columbus. As leasing activity picks up and development activity remains slack, most submarkets will post an improvement in vacancy in 2012.
Economic Vital Signs
The Columbus retail market is one of the strongest outside of the Upper Midwest, according to Marcus & Millichap’s National Retail Index (NRI). Only Minneapolis, Chicago and Milwaukee are expected to outperform Columbus through the end of the year. Columbus employers will expand payrolls by 1.1 percent this year, or by 10,000 workers.
In 2011, 2,000 jobs were created. Construction will remain well below the historical average as builders complete 255,000 square feet, expanding inventory levels by 0.4 percent. Limited new supply and an uptick in leasing activity will reduce vacancy 40 basis points this year to 10.2 percent. Asking rents are expected to rise 0.8 percent to $12.22 per square foot, while effective rents increase 1 percent to $10.31 per square foot.
Renewed strength in the manufacturing and service sectors in Central Ohio is shoring up retail real estate market fundamentals, operations and revenue streams. Loan delinquencies receded from their cyclical peaks last year and values firmed across most commercial property types, aided by a low cost of debt and the wide spread between cap rates and interest rates.
U.S. commercial mortgage originations rose 64 percent in 2011, totaling $197 billion. Gains were broad-based with virtually all property categories advancing significantly. Retail loans advanced at a slightly slower, but still strong, pace of 51 percent last year. Retail lenders remain cautious, however, and will continue to mitigate risk by mandating strong sponsorship, markets with proven tenant interest and need, and a stabilized cash flow.
Through year’s end, accommodative monetary policy will restrain interest rates. Also, global investors seeking safety will continue to migrate to U.S. government debt, keeping yields low. An estimated $363 billion of commercial and multifamily real estate loans will mature this year. Nearly 63 percent of maturing loans are considered underwater. Banks hold nearly 59 percent of maturing loans; another 15 percent are held in CMBS.
Only owners with tremendous credit and top-quality assets in primary or gateway markets will have access to conventional bank financing or life company loans.
Nearly $55 billion in CMBS loans will mature in 2012, approximately 35 percent of which are 5-year loans. These loans often include high loan-to-value (LTV) ratios and limited
borrower equity that is backed by assets with 5-year leases signed at peak rents that will likely reset to lower market rents.
Many will fail to refinance in the current lending environment. Of the $19.7 billion in CMBS retail loans that mature this year, nearly $2.6 billion have a debt-service coverage ratio of less 1. Lenders will require a substantial equity contribution to rein in LTVs to acceptable levels. Lending on the lower-quality, but not distressed, assets will ease until solid economic growth occurs. Loan assumptions and seller financing will moderate, but still fill the financing gap.
Investor Strategies
Multi-tenant investment activity will accelerate in Columbus this year as local syndicates target underperforming strip centers for value-add opportunities, while out-of-state buyers acquire larger Class A shopping centers. Opportunities will arise in pockets of Lancaster, Dublin and Worthington, where stabilized grocery-anchored centers will command returns in the mid-7 percent to mid-8 percent range.
Meanwhile, pending CMBS loan maturities will encourage some owners to discount properties in short sales. Investors with an appetite for risk will target these Class B and C strip centers, and they will inject capital to reposition the property in an attempt to capture higher rents within the next couple of years. Once the property is stabilized, operators with short-term horizons may be able to list the property with an exit cap rate of approximately 9 percent.
— Erin Patton is a senior director of the National Retail Group (NRG) with Marcus & Millichap Real Estate
Investment Services in the Columbus office.