Leasing incentives for all local property types account for almost 12% of asking rents, up from 9% in 2005 when conditions were stronger, Marcus & Millichap reports. By the end of this year, competition for tenants is expected to drive effective rents to $12.67 per square foot, a 7.2% annual drop and the lowest level seen in the past five years.
Although development activity has slowed considerably this year, moderating economic conditions will continue to soften Bay area retail, says Bryn Merrey, regional manager with Marcus & Millichap in Tampa. Retail completions in 2009 are likely to fall 70% below the five-year annual average, which may help offset weaker tenant demand, he says.
Retail developers completed 2.5 million square feet over the past year, up from 2.4 million the previous year, according to Marcus & Millichap's figures. The region's largest project, Cypress Creek Town Center in Wesley Chapel, is expected to open nearly one million square feet in fall 2010 after lengthy environmental delays.
Sales activity is off by 23% over the past year, remaining near historic lows though not as low as the 52% slowdown in deal velocity the previous year, Marcus & Millichap states in its third-quarter research report. Few trades have been recorded since the start of this year, while those that have went for a median price just above $100 per square foot.
"Moderating fundamentals, tighter underwriting and rising cap rates are keeping many investors on the sidelines," Merrey says, adding that investors in multitenant properties are concerned about the stability of noncredit tenants. Those properties currently on the market have cap rates in the mid-8% range, he says.
Meanwhile, single-tenant investment activity has picked up throughout this year, at a median of $164 per square foot, though interest has declined for pharmacies and fast-food restaurants. Merrey says established tenants with strong leases in solid locations will continue to garner interest, but at slightly higher cap rates ranging from mid-7% for top assets and at least 9% for lesser-quality assets.
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