Retail Pushes Forward Despite Flat Sales

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LOS ANGELES—The retail market is continuing to improve, despite relatively flat retail sales, according to a national retail report from Lee & Associates. The report shows that while vacancy rates decreased, absorption increased and rental rates edged up, retail sales only increased by .1% in the quarter. The automotive industry continued to lead the retail market, while seven of the 13 markets reviewed in the report saw decreases in food and beverage and electronic and appliance stores.

"The investment sale market has been driven by the supply and demand imbalance and low interest rates," Patrick Dempsey, a principal at Lee & Associates Arizona, tells GlobeSt.com. "Those two things have allowed—even in a lack-luster recovery by retailers—the retail market to get better. Low interest rates drive cap rates, but despite a pretty flat market, we are slowly absorbing the existing product. From a supply and demand perspective, the market is still recovering."

The lack of development has contributed to this supply/demand imbalance, according to Dempsey. "We haven't really had a development boom like we have had in previous recovery cycles," he adds. "We are seeing more net absorption and demand-driven strategic infill development in this cycle. We have had a sweet spot of strong net absorption and low interest rates. We don't see a building boom on the horizon, so we are going to continue to tighten up, which is good for retail and good for owners."

The report highlights seven markets across the country, showing Manhattan with the lowest retail vacancy rate at 3.3%, down for the quarter, and retail rents of $94.32 per square foot. Orange County, CA, came in second, with a 4.1% retail vacancy rate. Other markets have significantly higher vacancy rates and much lower rental rates, although there was improvement in the quarter. Chicago is one example, with an 8.1% vacancy and rental rates just above $15 per square foot. Indianapolis was the only market evaluated to have an increase in vacancy during the quarter, moving up to 6.4%, while San Diego's vacancy rate was flat.   

Both Dempsey and his partner Jan Fincham, a principal at Lee & Associates Arizona, agree that automotive sales are leading the market, but also pick out quick service food as one of the major retail types attracting consumers, despite the report showing losses in food and beverage for the quarter. "The fastest growing sector in retail seems to be the quick-serve restaurants, and that is where people are spending money. For investors, grocery-anchored shopping centers are the primary target," Fincham tells GlobeSt.com.

Fincham also questions the validity of the assertion that there has not been a significant increase in retail sales, noting the strength of the dollar. "The strong dollar makes our imports cheaper. The sales dollars are not as great because prices have declined, but some sectors are doing very well," he says, using the decline in oil prices as an example. "Oil prices are down, making fuel prices lower than they have been. That has put more money into consumers' pockets. Fuel station revenue is down, but that is because oil prices are down. Sales activity at fuel stations is good, but because of the lower prices, it shows up as a decline."

Both Dempsey and Fincham expect the retail activity to keep growing. They predict low interest rates through 2016 and no real or significant retail development, which will continue to tighten the market.

In Los Angeles, rising retail rents are pushing retailers into fringe locations, where rents are cheaper.