Retail Capital Market Update, Q1 2019

National Cap Rate Trends


National Retail Market: Cap Rate Trends, 2014 Q1 – 2019 Q1

Source: REIS, Real Estate Solutions by Moody’s Analytics


The retail cap rate trends, as seen in the chart above, show a very odd development: the average cap rate declined in the first quarter for the second quarter in a row, despite continued store closures and concerns about the overall retail market. Indeed, given all of the store closures in 2017 and 2018, it is surprising that retail cap rates held up as well as they have over the last year. Note, however, how retail cap rates climbed significantly in 2018, rising above the 10-year average of 7.9%. In the first quarter, the mean retail cap rate fell to 7.5%, from 7.8% in the fourth quarter and a high of 8.1% in the first quarter of 2018. This looks somewhat dramatic on this chart, but note that the vertical axis only spans 160 basis points from 7.0% to 8.6%. The 12-month rolling average was 7.8%, down slightly from 8.0% at the end of 2018, but equal to the ten-year average as the dotted blue line shows. We caution that selection bias runs deeper in retail property sales than in other categories as the range of properties that qualify as “retail” is much broader than that of office and apartment.

Believe it or not, these rates are consistent with the property market: the first quarter retail vacancy rate held steady at 10.2%, where it has remained for the last three quarters.  The mall vacancy rate increased to 9.3% from 9.0% as the closing of a number of Sears stores have hurt this beleaguered asset.  Rent growth has been flat or below the rate of inflation, but still, rents in most metros have not declined. In other words, the underlying retail market is holding up better than many had expected.  That said, the fallout from the store closures, as well as the continued restructuring of this sector, will continue to affect retail real estate in the coming year.


Average Price per SF


National Retail Market: Average Price per SF, 2014 – 2019 

Source: REIS, Real Estate Solutions by Moody’s Analytics


For the top 50 metros, the average price of $220 per square foot was little changed in the quarter, after dropping in the fourth quarter from the previous quarter high of $240 per square foot. For the top 10 metros, the average price increased from $240 per square foot to $275 per square foot. Both averages were higher than previous averages in 2018 and late 2017, but still below the peak averages seen in 2014 through 2016.  Both increases in average prices were consistent with the drop in cap rates.


Sales Volume


National Retail Market: Indexed Transaction Volume, 2014 Q1 – 2019 Q1

Source: REIS, Real Estate Solutions by Moody’s Analytics


As the chart above shows, retail sales volume has been volatile. After trending lower in 2017 and 2018, it spiked at the end of 2018 and then fell in the first quarter – mirroring the pattern observed in other property types (especially in the top 10 metros). Of course, the top 10 metros include more urban areas, while the top 50 include many of the larger suburban markets that have a wide range of inventory. As a general rule for retail, we caution that the newer properties in prime locations are far better off than older properties in less desirable locations or markets.  Moreover, the gap between the stronger properties or submarkets and the weaker properties and markets continues to widen most quarters. Take for example the sale of 131 North Orlando Avenue in Orlando, a Trader Joe’s anchored shopping center that traded for $63.5 million or just over $830 per square foot.  The center was less than five years old and is able to draw traffic with the popular Trader Joe’s as its anchor, along with a Shake Shack. A smaller but pricier property in Miami Beach traded for $1,470 per square foot. The CVS-anchored property at 983 Washington Avenue sold for $18 million.

These sales reaffirm the wide gap between the high-end properties in prime locations and those in older properties.  Still, the dark blue line shown here indicates that investors are still looking at properties outside of the gateway centers.

Analysis by Barbara Byrne Denham. Denham is a Senior Economist in the research and economics department at REIS, the team responsible for the firm’s market forecasting, valuation, and portfolio analytics services. Throughout her 20-year career, Barbara has written a number of white papers on the commercial real estate market.


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