Retail operations have likely bottomed in Cincinnati and will show signs of modest improvement through the remainder of 2012. Encouraged by a more stable job market and restored savings accounts, consumers are beginning to spend more freely. National retailers, which stalled expansion plans during the recession, will capitalize on discounted rents to move into prime retail corridors in Hamilton County and Northern Kentucky. Anchored shopping centers will outperform due to their ability to draw steady shopper traffic, keeping vacancy at Class A properties tight.
The revitalization of the CBD will attract young professionals, while the recent opening of The Banks project will boost visitor volume. Demand will pick up for inline space within the area as restaurants and boutiques look to capture the increase in foot traffic.
Developers who built in outlying areas will struggle to backfill unanchored strip centers. Until single-
family home sales pick up, lenders will be unwilling to provide start-up financing for local retailers, leading to a weak recovery in tertiary markets.
By the Numbers
Employment gains are driving modest improvement in the retail sector. Cincinnati employers created 10,400 jobs during the first quarter. On a year-over-year basis, 20,300 jobs were generated, an increase of 2.1 percent, raising employment to 98 percent of its pre-recession peak. Manufacturing is also recovering at a brisk pace after 7,400 workers were added to payrolls during the same period.
The improving job market helped ease local consumers’ concerns. An increase in spending in the last year generated a 4 percent rise in retail sales, although additional income growth is required to sustain the current trend.
Retail supply in the metro area expanded 0.2 percent during the 12-month period ending in the first quarter. Nearly 177,000 square feet of space came on line, primarily in the Northeast Hamilton/Blue Ash submarket late last year. In the previous 12 months, builders completed 190,000 square feet. Developers have approximately 2.5 million square of retail space planned for Cincinnati, though limited availability of construction funding has prevented most of the projects from advancing.
Roughly 1.4 million square feet of planned space is slated for West Chester. A mixed-use project dubbed University Square at the Loop recently broke ground downtown. The $82 million project will add 80,000 square feet of retail space, offices and 160 apartments in the area by mid-2013.
A slight uptick in demand and muted development helped tighten vacancy by 10 basis points in the first quarter to 13.1 percent, which is still 250 basis points above the historical average.
Since peaking at 15.8 percent during the recession, vacancy has fallen 140 basis points. Supported by minimal additions to supply and improving demand for space, vacancy in Northern Kentucky retreated 180 basis points in the last 12 months to a metro-wide low of 5.2 percent.
Rent growth has been anemic due to tepid demand and elevated vacancy in many submarkets. Effective rents have held steady in the last year, ending the first quarter at $11.85 per square foot.
Leasing incentives were unchanged at 15.7 percent of asking rents in the first quarter. Owners in the West/Northwest Hamilton submarket kept concessions at 13.7 percent of asking rents, below the metro average.
Investment Outlook
REITs and institutions will target shopping centers anchored by a nationally recognized chain in affluent areas this year, while private buyers seeking higher yields will continue to target well-located, single-tenant properties. Best-in-class, multi-tenant assets will attract institutional capital at initial yields of 8 percent, which are roughly 50 to 100 basis points higher than cap rates in larger metro areas.
Stock market volatility and low bond yields will sustain deal flow for single-tenant properties. Well-capitalized investors looking for a hedge against inflation and stable, long-term fixed income will target drugstores net leased to a creditworthy tenant for a period of 10 years or longer.
Cap rates for assets secured by an investment-grade tenant will average in the mid-6 to low-8 percent range, depending on length of lease and location, while properties occupied by a lesser-quality tenant will trade 100 basis points higher.
— Joshua Caruana is the regional manager of the Cincinnati office of Marcus & Millichap Real Estate Investment Services.