Further Vacancy Compression Expected For Single-Tenant Retail

Single-tenant retail is continuing to perform well as consumer foot traffic and spending in brick-and-mortar stores has heated up, with vacancy nearly matching year-end 2019 rates at 4.6% in April. 

New research from Marcus & Millichap notes that tenants absorbed more than 68 million square feet over the twelve-month period ending in March, and analysts say further vacancy compression is “probable” if tenants resume expansion plans and backfill existing space.

“Despite inflation and rising fuel prices, during the early months of 2022 retail spending gains have been widely distributed across store-based segments, which excludes purchases made online or at bars and restaurants. This suggests a broader shift in consumer behavior is ongoing, one with an emphasis on physical locations,” the report notes. 

Store-based retail sales comprised nearly two-thirds of all core retail spending in March and April, with inflation-adjusted core retail sales up nearly 18 percent over pre-pandemic numbers. Retail employment has also picked up, with 284,000 more people working in the sector today than pre-COVID.

“Store-based sales momentum has the potential to remain positive moving forward, as US households have more cash savings than debt, and the economy is expected to recoup all jobs lost during the pandemic by this summer,” the report states. “Companies will accomplish the latter by augmenting pay to fill open positions, supporting overall income growth.”

Marcus & Millichap also notes that buyers appear buoyed by solid fundamentals for the sector, with more than half of investors the firm surveyed saying they’ll increase their single-tenant portfolios this year. In addition, larger investors’ purchases of high-credit tenants and buildings with long-term leases will likely also push more private buyers into the sub-$3 million tranche, with more considering transitional assets and properties with noncredit tenants.

Tertiary markets are also drawing attention with single-tenant vacancy sitting before 4% at the beginning of April. That’s at least 60 basis points below primary and secondary market numbers.  Marcus & Millichap says tight conditions “suggests upside exists” in tertiary cities like San Antonio, Salt Lake City, Kansas City and the Central Valley region of California.