Retail Capital Market Update, Q3 2018

Retail Market: National Cap Rate Trends



Retail cap rate trends demonstrate as much volatility as office cap rate trends – although this would be expected considering the turmoil in the retail sector. Given the number of store closures announced in 2017, it is surprising that retail cap rates held up as well as they did last year. Retail cap rates have climbed significantly in 2018, however, rising above the 10-year average of 7.9%.  In the third quarter, the mean retail cap rate was 8.1% and the 12-month rolling average was 7.9%, which is equal to the ten-year average as this chart shows. Investors are clearly paying less for retail properties. You may recall that the mall vacancy rate jumped to 9.1% in the third quarter from 8.6% in the second; the average rent declined as well.  This jump in vacancy was largely due to Sears closings across the country. In neighborhood and community shopping centers, net absorption was positive in the third quarter. Net absorption was negative 3.6 million square feet in the second quarter, due largely to the Toys R Us store closings. Retail rent growth has been positive but very low.


Retail Market: National Sales Volume Trends



As this chart shows, retail sales volume has declined steadily over the last two years, particularly outside of the top 10 metros.  As the red line illustrates, retail sales volume has been very steady for the top 10 metros in 2018, but volume for the last seven quarters is 16% lower than the average volume in 2016.  For the remaining 40 metros, retail sales volume is 28% lower than it was in 2016. In the third quarter, the top five retail property transactions were all on the west coast including three in Los Angeles, where a Rodeo drive property traded for $245 million.


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.