LOS ANGELES—“Moderate but steady improvement” is the phrase Lee & Associates uses to describe retail's progress nationwide in the second quarter. Vacancy continued ticking downward, sales maintained the spotty track record they've seen over the past few years and development kept up at a modest pace. The status quo is likely to prevail for the remainder of the year, according to Lee's Q2 report.

“The up and down spending pattern has been ongoing, but there is just enough activity to keep the retail property sector moving in the right direction,” the report states. That means a 10-basis point decline in vacancy to 5.9%, and 26.8 million square of positive absorption, nearly half again as much as was absorbed in Q1 although nearly 30% less than in Q4 of last year. “In the past four quarters, over 112 million square feet of net absorption has been recorded, a phenomenal performance considering the uneven economic recovery and lingering consumer uncertainty.”

Lee sees more urbanized areas garnering most of the action in terms of absorption and rent growth, “as more retailers are catering to younger spenders who prefer to live, work and play in amenity-rich locales.” Such densely populated areas also continue to see the bulk of development activity. Q2 saw the delivery of 15.05 million square feet nationwide during Q2, bringing the total of completed inventory over the past year to 72.5 million square feet. Another 54 million square feet was underway as Q2 ended. Development will remain focused in mixed-use projects with residential and office components, where the opportunity for rent growth will be strongest, the Lee report predicts.

With regard to location, “retailers looking to be closer to the action are competing aggressively to secure space in CBD and suburban core locations where the demographics are improving,” the report states. That dovetails with comments Lee & Associates CEO Jeff Rinkov made in a GlobeSt.com interview at ICSC ReCon this past May. “We have a large group of newly employed people who are looking for pedestrian retail and entertainment opportunities,” Rinkov told GlobeSt.com.

That being said, the Q2 report notes that absorption in prime markets could begin to taper as the year progresses, due to supply levels that are already tight. The national average for rent growth during Q2—a mere eight cents to $15.04 per square foot—doesn't tell the whole story, according to the report.

“Rents in prime locations, especially in urban mixed-use projects, are seeing a much faster rise in rental rates,” the report states. “Traditional suburban markets are not faring as well, as those areas have fallen out of favor with recent shifts in the workforce that has millennials outnumbering the baby boomers who are retiring in ever larger numbers.” Indeed, the report cites millennials as drivers of retail change “in all markets and product segments.”

In part because of the shopping preferences of millennials, the Q2 report notes that the brick-and-mortar and online retail segments continue to converge “in terms of structure and long-term strategy. Major online retailers are adding physical locations, while traditional expand their online presence to appeal to a larger cross-section of retail consumers.”

This dual presence becomes the platform for omni-channel retailing, “an integrated online/in-store experience that maximizes brand value and customer loyalty. Traditional retailers recognize the growth in online spending, but online sellers now recognize that most shoppers still prefer the in-store experience when it comes to making buying decisions.”