CALABASAS, CA—Although some formerly prominent retailers have seen better days, the retail sector itself is enjoying one of its best years in the past decade, thanks in large measure to steady job growth. Marcus & Millichap predicts that vacancies will decline 30 basis points to 5.9% for the best year-end showing since 2000, while rents will appreciate at their fastest level since 2007.
It's a measure of how broad-based the retail recovery has become that among the various indices in MMI's 2016 Retail Investment Forecast, a different market tops each one. San Francisco tops the overall National Retail Index of forward-looking indicators, yet other cities lead the rankings for specialty indices within the forecast.
For instance, Detroit and three other Midwestern markets lead the High-Yield Index, which ranks metro areas that have the greatest multi-tenant cap rates, based on a trailing three-year average. The best market in MMI's Competitive Environment Index is Northern New Jersey, based on a combination of below-average vacancy rates and limited new construction. There's more geographic diversity among the other top markets in that index: Los Angeles, Seattle-Tacoma and Kansas City fill the next three slots.
MMI's Retail Efficiency Index, which measures the markets that will have the highest increase in retail sales this year per square foot of inventory, also runs the gamut, geographically speaking. Salt Lake City, which ranks twelfth in the overall NRI, tops the efficiency index, followed by Portland, OR; Boston; and West Palm Beach, FL.
Columbus, OH, which comes in second to Detroit in the High-Yield Index, leads MMI's Total Return Index. “Seven years into the recovery, rents and asset pricing have increased far above the trough, providing owners with sizable returns,” according to MMI's forecast. “Job creation has spurred household formation, necessitating more shopping options and encouraging retailer expansions in many metros. As a result, heightened competition for well-placed assets is advancing valuations in many primary markets, leading buyers to consider higher-yield metros or value-add opportunities to generate elevated returns.”
One condition that's likely to prevail in the near term for retail is a limited horizon for new additions to the inventory. MMI's forecast predicts that steady demand for space will “further strengthen property performance in the coming months as projected completions edge lower from last year's total. The surge in multifamily construction has made it more difficult for retail developers to find quality locations that pencil, limiting construction.” That being said, the forecast notes, “the pipeline of planned projects has increased significantly, raising the prospects of a surge of completions beginning in 2017 should the supply-and-demand trends push rental rates sufficiently.”
Pricewaterhouse Cooper's latest Real Estate Investor Survey anticipates that those supply-and-demand trends will continue in the retail sector's favor. “The retail market appears to be poised to take advantage of a number of tailwinds; rising incomes, improvement in the housing market, new retailer expansion and repositioning by existing retailers,” according to a report on the survey's finding. However, the report cautions that despite the improving outlook, “investors will need to carefully navigate what promises to be a continually changing environment that will offer challenges along with opportunity.”
CALABASAS, CA—Although some formerly prominent retailers have seen better days, the retail sector itself is enjoying one of its best years in the past decade, thanks in large measure to steady job growth. Marcus & Millichap predicts that vacancies will decline 30 basis points to 5.9% for the best year-end showing since 2000, while rents will appreciate at their fastest level since 2007.
It's a measure of how broad-based the retail recovery has become that among the various indices in MMI's 2016 Retail Investment Forecast, a different market tops each one. San Francisco tops the overall National Retail Index of forward-looking indicators, yet other cities lead the rankings for specialty indices within the forecast.
For instance, Detroit and three other Midwestern markets lead the High-Yield Index, which ranks metro areas that have the greatest multi-tenant cap rates, based on a trailing three-year average. The best market in MMI's Competitive Environment Index is Northern New Jersey, based on a combination of below-average vacancy rates and limited new construction. There's more geographic diversity among the other top markets in that index: Los Angeles, Seattle-Tacoma and Kansas City fill the next three slots.
MMI's Retail Efficiency Index, which measures the markets that will have the highest increase in retail sales this year per square foot of inventory, also runs the gamut, geographically speaking. Salt Lake City, which ranks twelfth in the overall NRI, tops the efficiency index, followed by Portland, OR; Boston; and West Palm Beach, FL.
Columbus, OH, which comes in second to Detroit in the High-Yield Index, leads MMI's Total Return Index. “Seven years into the recovery, rents and asset pricing have increased far above the trough, providing owners with sizable returns,” according to MMI's forecast. “Job creation has spurred household formation, necessitating more shopping options and encouraging retailer expansions in many metros. As a result, heightened competition for well-placed assets is advancing valuations in many primary markets, leading buyers to consider higher-yield metros or value-add opportunities to generate elevated returns.”
One condition that's likely to prevail in the near term for retail is a limited horizon for new additions to the inventory. MMI's forecast predicts that steady demand for space will “further strengthen property performance in the coming months as projected completions edge lower from last year's total. The surge in multifamily construction has made it more difficult for retail developers to find quality locations that pencil, limiting construction.” That being said, the forecast notes, “the pipeline of planned projects has increased significantly, raising the prospects of a surge of completions beginning in 2017 should the supply-and-demand trends push rental rates sufficiently.”
Pricewaterhouse Cooper's latest Real Estate Investor Survey anticipates that those supply-and-demand trends will continue in the retail sector's favor. “The retail market appears to be poised to take advantage of a number of tailwinds; rising incomes, improvement in the housing market, new retailer expansion and repositioning by existing retailers,” according to a report on the survey's finding. However, the report cautions that despite the improving outlook, “investors will need to carefully navigate what promises to be a continually changing environment that will offer challenges along with opportunity.”
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.