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Commercial Department: Property TypeCast: November 2017

 

Property TypeCast

Retail real estate has defied the naysayers

c_2017-11_property_typecast_chartThe retail sector made headlines in first-quarter 2017 as many retailers announced store closures. The doom-and-gloom reports cast a pall over the real estate landscape, with some experts predicting the end of retail as we know it.

Two quarters later, the media seems to have grown weary of the retail sector, not only because the announcements of store closures have subsided somewhat, but also because retail real estate statistics have largely defied what so many had forecasted. Vacancy rates have not soared, but rather have held steady, and rents have not plummeted. They have stayed flat.

The second-quarter 2017 vacancy rate climbed to 10 percent, up from a 9.9 percent mark in the prior quarter, as 40 of 80 U.S. metros saw negative net absorption. Still, most had expected negative net absorption across the spectrum.

Rent growth was 0.4 percent for the second straight quarter, although 19 of 80 metros posted a rent decline in the quarter. Most metros posted flat or marginal increases in rent, and only nine metros saw rent growth of 1 percent or more.

In fact, our analysts track the retailers that are opening new stores, as well as closing, and a number of interesting companies are expanding. These include grocery-store concepts such as H Mart, Zion Market, 99 Ranch, Sprouts, Butera Market and Aldi. The first three markets all specialize in Asian food. Sprouts specializes in organic food, while Aldi is a discount grocery chain.

Other new or expanding lessors of retail space include resellers Habitat ReStore (of Habitat for Humanity) and Goodwill; outfitter Sierra Trading Post; gyms Planet Fitness and UFC Gym, as well as trampoline park Rockin’ Jump. In short, the anecdotal findings reaffirm what everyone knows about the retail industry: Consumers prefer new or fresh brands over the old, stale brands. These findings also contradict the doom-and-gloom outlook for the retail sector.

Looking at the bigger picture, consumers continued to shop during the past year. Reis has been tracking a variable called real estate-using (REU) retail sales. REU does not include auto and gasoline dealers or non-store retailers, including e-commerce sales, but it does include restaurant sales. While the trend lines shown in the chart on this page indicate that REU sales have slowed a bit, relative to overall retail sales, REU sales growth has remained positive.

Although a disproportionate share of this growth is attributable to restaurant-sales growth, the trend line without restaurant sales would still be positive. Retail employment numbers show that only 31 of 82 metros tracked by Reis posted job declines in the retail and restaurant industry this past second quarter. Although, oddly, some metros that had job losses saw rent increases while some metros that saw rent declines had job gains.

As for rent growth by metro area, those with the highest year-to-date growth through this past second quarter include San Jose and Oakland, California; Tacoma, Washington; Denver and Miami. All saw rent growth of 1.8 percent to 2.5 percent. At the opposite end, rent declines were highest in Chattanooga, Tennessee; Tucson, Arizona; Kansas City, Missouri; Oklahoma City and New Orleans. Rent declines ranged from 0.25 percent to 0.7 percent.

Most metros saw little to no change in rents as landlords have been realistic about the headwinds their retail tenants face from e-commerce. To that end, many retail centers have tried to lure more entertainment and service-related businesses to draw foot traffic to their stores. Indeed, retail real estate owners will need to stay creative to keep up with the ever-shifting demands of consumers, and it appears that new and fresh concepts will always be a draw.


 

Victor Calanog is chief economist and senior vice president for research at Reis Inc. (www.reis.com). He writes a monthly column on property types for Scotsman Guide. Calanog and his team of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at victor.calanog@reis.com. Barbara Byrne Denham is an economist in the research and economics department at Reis Inc. She previously served as chief economist at Eastern Consolidated and is a Ph.D. candidate at New York University, where she has studied economics, monetary theory and game theory. Reach her at barbara.denham@reis.com.

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