Kimco Realty Blog

There are several factors anchoring our thinking as to how 2012 will play out for the retail real estate market. We look at the market trends that have shaped and are continuing to shape the industry, the economic climate domestically and abroad, as well as activity happening in our portfolio and the trends we’re seeing among our tenants. With that in mind, here’s our outlook for retail real estate in 2012, and what we think retailers and investors will have on their radar this year:

1. Retail development will continue to be slow. This naturally will be driven by the continued stagnancy of the housing market. However, we can expect to see some small developments as the economy continues its recovery, such as single-tenant structures, small grocery-anchored centers, and development of available land in infill locations.

2. The supply/demand equation will strengthen for landlords. Despite the down housing market, strong retailers are still looking to strategically grow their footprints and store counts. It’s a matter of finding optimal locations to support these growth plans. From what we’ve seen, urban areas and first-ring suburbs are hot on retailers’ radar, due to their high density and established demographics. As retailers expand, available inventory will of course shrink, and the supply and demand equation will strengthen for landlords.

3. Investments outside of the U.S. will help diversify risk and balance stability. Although the U.S. economy continues to recover slowly, America remains a safe haven for investments. However, we’ve also historically believed a well-diversified portfolio is crucial to withstanding economic cycles. This is one reason why Kimco has diversified outside of the U.S. and strategically invested in areas in Mexico and Canada, as well as Chile, Peru, and Brazil. We will continue to look to capitalize on new real estate opportunities in those areas in 2012 to balance stability and growth.

4. E-commerce will play an increasingly important role in retail business strategy. Many retailers see e-commerce as a complementary component to their overall business strategy to increase sales and drive foot traffic. Landlords will be increasingly working with their retailers to drive customers to their stores through e-commerce as well as social media and other technologies, and maximize their multi-channel strategies.

5. Small retailers will begin to stabilize their businesses. Many mom-and-pop shops continue to face a challenging competitive landscape against their larger competitors, particularly the e-commerce retailers. However, some small retailers will begin to stabilize their businesses in 2012. In our portfolio, for example, we’ve seen greater resiliency among our small retailers in recent months. We’re seeing more activity in what were difficult markets a couple years ago — California and Arizona, in particular. Hispanic and Asian family-based businesses are also starting to pick up, and tenants’ requests for rent relief are down.

6. Retail real estate prices in 2012 will continue to be discriminating. We’ll continue to see higher quality properties demanding premium prices this year. This will mainly be driven by the sluggish market, combined with fear and uncertainty about the future impact of online retail on brick-and-mortar retail, as well as the effects of the European debt crisis on the U.S.

7. Interest rates will remain low. Although I hate making predictions about interest rates, I’d be remiss not to include this point in our 2012 outlook. Interest rates are going to remain low for the foreseeable future, but we all know they only have one place to go — up. It’s just a question of when. Cap rates are influenced by interest rates, so it is especially important to carefully underwrite acquisition opportunities to avoid overpaying for properties.

8. Factors outside of the industry could hamper a recovery. It will be macroeconomic events, rather than real estate fundamentals, that have the potential to hinder the REIT industry’s ongoing recovery. It remains to be seen how the European markets will impact the U.S. markets and general investor confidence. However, the debt crisis is a factor that could potentially stifle the ongoing recovery of REIT prices and real estate valuations.

9. Small, service-oriented retailers will continue to grow. We’re seeing retail growth bent toward small, personal, service-oriented retailers. This includes smaller spas, gyms, and hair and nail salons. These businesses provide services that can’t be purchased online, and will forever have their place in brick and mortar centers.

10. Strategic promotions will drive consumer spending in 2012. Consumers will continue to be cost conscious in 2012, and spending will be moderate. However, strategic promotions will draw consumers out of their shell over time. This of course makes it increasingly important for landlords to position their centers with strong retailers that are gaining a share of the consumer’s disposable dollar. Strong retailers will be those focused on good, old-fashioned retail operating skills to shore up their business.

11. Redevelopments will increase. Most new construction in 2012 will be redevelopments — expansions and outparcels to existing centers. Box retailers and junior box retailers have been absorbing space recently. Some supermarkets and warehouse clubs, such as Costco, are adding gas stations on available outparcels at our properties; Target has been growing its grocery section; and Walmart has been rolling out in-store medical clinics. We might also see some small ground-up developments this year, such as centers anchored by a grocer or supermarket and with a few shops surrounding it. Some mixed-use development might also crop up, combining retail and residential properties. Kimco, for instance, was recently approved to convert some of the Wilde Lake shopping center in Columbia, Md., into multi-family apartments.

12. Some box retailers will continue to reduce their footprints. For some retailers, online has proved to be a better channel to sell certain products. As a result, these retailers are reducing their physical footprints to focus resources on their online channels. We saw this last year with big-box office suppliers, including Staples and Office Depot, as well as other retailers, such as Gap and Best Buy. However, while these retailers are downsizing, others are filling the vacant space in high-quality shopping centers. Recently in our portfolio, we completed one deal in which Best Buy reduced its footprint, and a cosmetics store filled the space. We’re currently working on three similar deals.

Taken together, we believe these factors portend a sturdy year for retail real estate. The fundamentals of the shopping center business will move along slowly but solidly, with several pockets of the market stabilizing and beginning to grow.

What does 2012 hold from your perspective?