National report indicates boost in retail investments.

Marcus & Millichap Real Estate Investment Brokerage Company, the nation's largest real estate investment brokerage firm, recently released its National Retail Research Report for 2004, which indicates that improving fundamentals and solid demand will support prices for retail investments in the near term.

"The retail sector boasts the best fundamentals among the various property types and that is reflected by high investor demand," said Bernard J. Haddigan, national director of Marcus & Millichap's National Retail Group. "Continued economic recovery and job growth bode well for both retailers and investors. With escalating pricing, today's market provides sellers with a window of opportunity to shed underperforming assets or reposition their portfolios."

Included in the report is the firm's annual National Retail Index (NRI), a snapshot analysis that ranks 40 retail markets based on a series of 12-month forward-looking supply and demand indicators. Markets are ranked according to their cumulative weighted-average scores for various indicators, including forecasted employment and household growth, vacancy, construction, personal income and rent growth. The index is designed to indicate relative supply and demand conditions at the market level.

Following are some of the most significant aspects of the report:

Self-sustaining growth, supported by increased business spending, will boost GDP by 4.0 percent to 4.5 percent in 2004.

Job gains will pick up momentum, but at 1.5 percent, growth will be below trend when compared to past recoveries. Low inflation and a weak job market are providing the Fed with an opportunity to keep interest rates low. New and existing home markets remain red hot with sales activity and prices reaching all-time highs in many areas. Retail sales advanced by 6.5 percent in 2003 with growth of 4 percent to 5 percent expected in 2004.

* Store openings in 2003 rose by approximately 5 percent, which offset the numerous closures during the year. Retailers are expected to boost the pace of expansion by nearly 9 percent this year.

Expansion will help offset additional store closures and higher levels of construction activity, allowing vacancy to improve 50 basis points in 2004 to l0 percent. Asking rents are forecast to rise by 2.5 percent this year, up from growth of 2 percent in 2003. Rising rents and occupancies will counteract the effects that a modest increase in interest rates may have on values. As Wal-Mart's Neighborhood Markets increase market share in many regions, some of the weaker grocery chains will be unable to compete. Niche and specialty grocers are expected to fare better than their traditional counterparts.

* Despite concerns of rising interest rates and capital shifting away from retail real estate, improving fundamentals and demand will support prices, yet appreciation will probably slow. Cap rates are expected to decline modestly this year, following a dramatic drop-off from 2000 to 2003.

Retail returns reached 16.7 percent in 2003, up from 13.7 percent in 2002 and close to hitting the 20-year high of 16.9 percent. Strong demand for properties supported a 3 percent increase in transaction volume during 2003. Still, investors may cut poor performers from their portfolios this year, but those able to successfully reposition underperformers in tandem with the economic recovery will be rewarded. The weakening dollar is expected to encourage foreign investors to purchase U.S. retail properties; German and Australian investors are expected to seek quality neighborhood and community centers.

The report also concluded that New York-Manhattan climbed into the top 10 NRI universe thanks to minimal new construction and a low per capita retail inventory.