Retail Market: National Cap Rate Trends
The chart below reveals a very odd development: the average retail cap rate declined in the fourth quarter, despite continued store closures and concerns about the overall retail market. Given all of the store closures in 2017 and 2018, it is surprising that retail cap rates held up as well as they did last year. However, retail cap rates did climb significantly in 2018, rising above the 10-year average of 7.9%. The mean retail cap rate fell to 7.5% in the fourth quarter, which looks somewhat dramatic on this chart, but note that the vertical axis only spans 100 basis points from 7.0% to 8.0%. The 12-month rolling average was 7.9%, which is equal to the ten-year average, as the dotted 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.
Surprisingly, these rates are consistent with the property market: the fourth quarter retail vacancy rate held steady at 10.2% after rising a bit in the second quarter due to the Toys R Us closings. Likewise, the mall statistics stabilized following a jump in vacancy in the third quarter due to the Sear’s store closings. In other words, the underlying retail market is faring much better than the media would lead many to believe. Rent growth has been flat or below the rate of inflation but rents in most metros have not declined.
National Retail Market: Cap Rate Trends, 2013 Q4 – 2018 Q4
Source: REIS, Real Estate Solutions by Moody’s Analytics
Retail Market: Average Price per Square Foot
For the top retail 50 metros, the average price was unchanged from the previous quarter at $130 per square foot. For the top 10 metros, the average price fell slightly from $195 per square foot to $185 per square foot. Both quarters’ averages were higher than previous quarters in 2018 and late 2017, but still below the peak averages seen in 2014 through 2016. Still, you may be wondering how the average cap rate fell when the average price per square foot for these metros was flat. In short, we advise not to read too much into these inconsistencies. Our calculation of the average price per square foot includes all transactions, yet we do not calculate a cap rate for every transaction. Moreover, sometimes a high profile sale that is not in the top 50 metros may have heavily influenced the average cap rate trend.
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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