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Retail Pre-Tax Yield Rates Retreat

Sluggish sales do not bode well for retailers, or for investors in regional retail malls, retail power centers, and neighborhood/community retail centers, says Managing Director Don Burns, and reflected by data released in the summer 2009 RERC Real Estate Report.

Real Estate Research Corporation’s (RERC’s) required pre-tax yield rates for these retail sectors, which had been increasing or holding steady thus far throughout the recession, sharply retreated in second quarter 2009. Required pre-tax yield rates (also referred to as discount rates or IRRs) for regional malls declined to 9.3 percent from 10.1 percent in first quarter, while pre-tax yield rates declined 30 basis points to 10.0 percent and 9.4 percent, respectively, for power centers and neighborhood/community centers.

This decline in returns reflects what Don Burns, CRE, FRICS, MAI, managing director and head of RERC’s southeast operations, is seeing on a national level for retail property. “The owners of retail properties we are involved with continue to struggle with store closings and tenants seeking rent relief,” said Burns. “A significant number of leases are being converted to a percentage-of-sales rent only, while tenants and landlords work through issues. Uncertainty is created by the fact that some retail tenants are in bankruptcy and some retail chains have been purchased by entities that will eventually close stores. In addition, many retail properties have co-tenancy issues whereby stores that have been able to stay open are potentially able to leave, as overall occupancy drops below a certain level. While there are some renewals, there is not much in the way of new leasing, and rents are not going up.

“For example, three properties I have recently looked at are showing 2009 year-to-date sales off 15 to 20 percent from 2008 sales, which were down from 2007. Retail rents are a function of tenant sales, and as long as sales volume declines, rents will not increase. In fact, some landlords expect occupancy and sales to further deteriorate, and if that occurs, we expect rents to continue to decline,” Burns continued.

From an investor’s perspective, regional retail malls earned the lowest investment conditions rating among the core property types during second quarter, with a rating of 2.8 on a scale of 1 to 10, with 10 being high. Retail power centers were rated slightly better, but at 3.2, earned the second lowest investment conditions rating among core properties.

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