Escalating Confidence Bodes Well for Retail
CALABASAS, CA- As we near the mid-point in the calendar year, our latest barometer on trends confirms that a slow, steady expansion characterizes US economic performance, led by a solid rebound in housing, resilient consumer spending, broad-based private sector employment growth, and continued expansion in the energy and technology sectors.
This environment is having a much-needed impact on the retail real estate market, led by continued confidence by consumers. Retail sales have rebounded 11.8% from the pre-recession high, and the firming recovery in the residential sector will lift consumer spending as home sales and employment growth gain momentum.
Significant challenges remain, however, as consumers continue to adjust to high structural unemployment, subdued personal income growth and higher payroll taxes. A bifurcated spending pattern favoring the discount and luxury ends of the consumer spectrum persists, underscoring that recovery remains uneven and segments of the population continue to struggle.
For their part, retailers have emerged from the recession with better defined concepts, healthier balance sheets, and improved business models. The number of retail store closings announced in the first quarter of this year declined nearly 70% compared with the same period last year, while retailers vacated 11.9 million square feet, down from 25.4 million square feet last year. Retailers also announced in the first quarter twice the number of store openings relative to closings, near two-thirds of which will be discount dollar stores.
Limited new supply has helped to stabilize retail space fundamentals, with new supply totaling 10% to 25% of the long-term average. Recovery in strip and neighborhood centers has lagged gains in malls and power centers, but the national vacancy rate for shopping centers decreased 50 basis points over the last year to 10.7% as of first quarter. Although rents continue to fall nationally on a year-over-year basis, many coastal markets, such as San Francisco, Los Angeles, New York, Boston, and South Florida, have posted strong rent growth.
Broader regional economic growth and improving financial conditions for both consumers and retailers is helping to limit downside risk to investment in well-located retail properties.First quarter sales of retail properties totaled $21.1 billion, representing a 32 percent increase from last yearís volume, which was buoyed by two large mall portfolio transactions. Meanwhile, sales rose 53 percent on a year-over-year basis. Strip centers accounted for nearly half of all transactions, followed by single-tenant properties.
CMBS financing has paved the way for investment in a broader geography and created a more competitive financing arena for retail properties. CMBS loan originations totaled more than $37 billion in the first five months of this year compared with $48 billion for all of 2012.
Moving forward, the retail sector will benefit from accelerating job creation, which will stimulate stronger income growth and support household formations beyond recession-induced lows. Metros with above-average population and employment growth, such as the Texas and Southwest markets, should post significantly improved operations while supply constrained, high income coastal markets will continue to reap solid effective rent growth for limited availabilities.
The merger of retailers such as Office Max and Office Depot will create additional large block space opportunities for retailers such as specialty grocery stores. Net absorption of retail space is forecast to total 79.7 million square feet in 2013, outstripping new supply of 55 million square feet, and firmly driving down the national vacancy rate 40 basis points to 7.7%. Nationally, asking rents are forecast to grow 1.8% to $16.06 per square foot.
Overall, we see that the favorable outlook for economic and demographic growth, firming property fundamentals, and low-yielding alternative investments continuing to drive strong investor demand for retail properties.
Hessam Nadji is a SVP and managing director at Marcus & Millichap. The views expressed in this column are the authorís own.
To read Hessamís take on the national office market, see the recent GlobeSt.com article on the subject.
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