SNAPSHOT, APRIL 2004

Cincinnati Retail Market

The Cincinnati retail market has stabilized and will further improve this year, according to Jonathan Lee, regional manager of Marcus & Millichap’s Cincinnati office. Steady construction activity will be met with rising demand, which will keep vacancies in check and allow for the return of rent growth at a modest pace. Buyers will continue to outnumber sellers, which will hold prices firm, but transaction velocity may ease slightly as the stable of available properties offered for sale remains limited.

“Downtown Cincinnati’s retail market needs new life because several retailers have vacated or are considering leaving the downtown market,” Lee says. This trend is due to declining sales or strategic changes that have led retailers to open-air lifestyle centers in the suburbs. City officials are concerned about this situation, particularly at the troubled Tower Place mall. The mall is losing retail giants Banana Republic and Williams-Sonoma, along with several other retailers including Franklin Covey, Essential for the Body and Soul, Dino’s and August Max Women. In an effort to invigorate the urban core, Cincinnati Center City Development Corporation has planned a revitalization of Fountain Square that is expected to include the addition of street-level retail shops, entertainment venues and dining options.

“Suburban retail centers and traditional malls are answering the competitive call levied by lifestyle centers,” Lee says. For example, Eastgate Mall completed a $22 million renovation and is currently pursuing two additional anchors. The Beechmont Mall plans to reopen as Anderson Towne Centre, an open-air retail center with Lazarus, Big Kmart and Kroger as anchors. The 1.5 million-square-foot Forest Fair mall will reopen this year as Cincinnati Mills, and it will offer several shopping neighborhoods, theme restaurants and entertainment options.

According to Lee, the overall Cincinnati economy has stabilized, and there has been firming in the financial services, leisure and hospitality sectors. Current forecasts suggest approximately 20,000 new jobs will be created this year, which equals an increase in total payrolls of 2.2 percent. Last year, job growth amounted to only 0.9 percent.

“Retail sales growth this year will mirror the 2003 rate of 3.2 percent, but this growth could be threatened by rising interest rates increasing the drag of household debt on disposable income,” Lee says.

Retail construction remains steady throughout the Cincinnati metropolitan statistical area (MSA). There are currently 18 projects, which total 1.4 million square feet, under construction. Of that number, 1.3 million square feet of space is scheduled for completion this year, Lee says. The Streets of West Chester and Deerfield Towne Center account for two-thirds of the space under construction, while the remainder is evenly divided between big-box projects, in-line space, drugstores, restaurants and grocery stores. In addition, there are 24 planned projects, or 2.9 million square feet of space, in the pipeline. The Millworks Urban Village redevelopment, which is located at the former Milacron plant site, represents 1 million square feet of space.

According to Lee, the overall vacancy rate is expected to ease slightly this year, to 10.8 percent, compared to 10.9 percent recorded at year-end 2003. While rent growth will remain marginal this year, at an average of 0.5 percent, certain submarkets will outperform others. “Northern Kentucky will continue to be the healthiest submarket, posting vacancies of less than 7 percent and rent growth in excess of 3 percent,” Lee says. “Conversely, the West/Northwest Hamilton County submarket will continue to languish with vacancies in excess of 15 percent, causing owners to remain competitive with asking rents.” On average, owners in this submarket shaved more than 5 percent from asking rents in 2003.

“Single-tenant, net-lease properties remain the product of choice for retail buyers in the Cincinnati marketplace,” Lee says. Consistent with last year, this segment of the market will account for the majority of total retail transactions this year. However, the number of sales is unlikely to meet the velocity recorded in 2002 and 2003. Fortunately for investors, expansion in this sector continues throughout the MSA, which should provide new opportunities throughout this year.

Last year, sales of single-tenant properties continued to rise, with the number of transactions increasing nearly 12 percent when compared to 2002. Buyers were successful in locating available properties in the Butler County and Forest Park/West submarkets, which accounted for more than 50 percent of the recorded sales.

The majority of single-tenant sales consisted of general freestanding stores, restaurants and fast-food outlets. The median price for fast-food restaurants was $259 per square foot, with capitalization rates ranging from 7 percent to 8 percent. Prices for general freestanding stores remained stable at $94 per square foot. The highly coveted drugstore chains remained elusive to buyers.

This year’s retail investment environment will be similar to last year’s, with continued focus on the single-tenant, net-lease sector of the market. Transaction velocity is expected to remain stable completed with last year’s figure, but quality assets in prime locations will be hard to acquire. “This will force buyers to consider properties in outlying areas,” Lee says. “Strong buyer demand will hold cap rates in check, allowing sellers to achieve favorable pricing despite a likely rise in interest rates later this year.”

In 2003, the multi-tenant sector of the retail market accounted for only 30 percent of the retail transactions recorded, but the median price rose 35 percent when compared to 2002 (to $84 per square foot). The spike in median price resulted primarily from the sale of three neighborhood and community centers in Kenwood for a median price of $125 per square foot, overshadowing the balance of sales, primarily of strip centers, which sold for a median price of $65 per square foot.


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