17 November 2008
Retail Market Analysis
Vacancy moves higher while
rents turn down
Lou Taylor
Research Analyst
(1) 203 863 2381
louis.taylor@db.com
Vin Chao
Research Associate
(1) 212 250 6799
vincent.chao@db.com
New bankruptcy law and weak housing growth push vacancy higher
Deutsche Bank Securities Inc.
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Industry Strategy
Global Markets Research Company
For the third consecutive quarter, absorption was negative in the top 24 metros.
We think this reflects the revised bankruptcy law which led to retailer liquidations
mid year rather than in Q1. We believe the weak housing market is playing a role
as well with vacancy rates rising the fastest in the weak housing markets.
Occupied space contracted by -951ksf in Q308, which compares to negative
absorption of -1.3msf in Q208. This drove vacancy higher (up 20bps sequentially
to 6.8%). Rents slid 20 bps sequentially. We expect this trend to continue in
2009. We have a 300 bp vacancy increase in our FFO estimates (and no rent
growth).
Raleigh-Durham and Phoenix led in absorption
Raleigh-Durham (326ksf) had the best absorption followed by Austin (257ksf) and
Los Angeles (154ksf). Suburban Virginia had highest negative absorption (-387ksf),
followed by Tampa (-297ksf) and Philadelphia (-215ksf). On a trailing 12-month
basis, Raleigh-Durham had the highest absorption of the top 24 metros, at 722ksf,
followed by Phoenix at 659ksf and Houston 610ksf.
Vacancy crept higher and rent growth decelerated further in Q308
The vacancy rate in the top 24 metros increased 20bps sequentially to 6.8% in
Q308. Year-over year, it is up 90bps. The vacancy rate in Suburban Virginia
increased 90bps from Q2 to 4.7%. Year-over-year, the rate was up 190bps. Tampa
(8.3%) followed with a sequential vacancy increase of 80bps. Orlando (8.0%) was
next, up 70bps sequentially. Year-over-year, Tampa was up 160bps and Orlando
was up 230bps. Rent growth decelerated to +1.0% in Q308 down from 1.8% in
Q208 and the 3.3-3.9% pace over the 2006-2007 periods. Sequentially, rents were
down -0.2%, which compares to +0.2% in Q208.
Among the 24 metros, vacancy still low in California
San Jose had the lowest vacancy rate at 3.8%, up 20bps sequentially and 120bps
year-over-year. Next was Los Angeles and Orange County at 3.9% each. This
represented a 50bps sequential increase and 130bps year-over-year increase for
both metros.
Construction to inventory up in Austin but declines in Tampa and Boston
Construction as a percentage of inventory was 7.2% in Q3, which compared to
8.1% in Q2 and 8.0% in Q1. There were 21 million square feet of completions and
13.6 million square feet of starts. Approximately 62% of this space delivers
through 2Q09.
We expect weakness into 2009
We expect additional bankruptcies and store closures after the holiday season, as
the economy continues to contract. As we noted above, we expect the vacancy
rate to rise 75 bps per quarter thru mid 2009 with no rent growth on expiring
leases. This implies a 10% drop in market rents over the next year. We’ll reassess
our assumptions after Q4 results. With many stocks trading at 2-5x earnings, we
think this weakness is reflected in many of the stocks.

Table of Contents
New bankruptcy laws and weak housing drive closures............... 3
Third quarter of negative absorption............................................... 5
Austin limits the vacancy increase to 20 bps ............................................................................5
Rent growth decelerated further this quarter............................................................................8
Construction levels decline in Q3, delays pick up ........................ 11
Appendix: Top 24 metros................................................................ 18