Retail Preliminary Trends, Q1 2019

Preliminary Trends Announcement: National Retail Market

 

Retail Sector Trends

The neighborhood and community shopping center retail vacancy rate was unchanged at 10.2% in the first quarter. It was 10.0% a year ago.

Both the national average asking rent and effective rent, which nets out landlord concessions, increased 0.4% in the quarter. At $21.30 per square foot (asking) and $18.65 per square foot (effective), the average rents have both increased 1.6% from the first quarter of 2018.

With the closing of more than two dozen Sears stores, the Regional Mall vacancy rate increased 0.3% to 9.3%. The average rent, however, was flat in the quarter. A number of other Sears stores closed in the quarter, but they were not included in the regional mall trends, either because they are owner occupied or they are outside of our geographic coverage. The mall vacancy rate had jumped 0.5% in the third quarter of 2018 due to earlier Sears store closings. Many Sears stores remain in operation.

For neighborhood and community shopping centers, net absorption was 949,000 SF, lower than the previous quarter’s absorption of 1.48 million SF but in line with absorption in the first quarter of 2018. New completions measured 832,000 SF, lower than 2.25 million SF completed in the fourth quarter. Current construction underway is expected to add close to 8 million SF to the inventory this year, in line with that of 2018.

Our tracking of retail leases shows that a number of stores continue to open. Of more than 16 million SF of leases signed in the last five quarters, our findings show that grocery stores were the leading new occupant followed by home/houseware stores, gyms/fitness, discount variety stores, and discount clothing stores. Trampoline parks were also in the top 10. Other media reports of store brands expanding include Five Below and Hobby Lobby. Still, other stores expected to close this year include JC Penney, Payless, Charlotte Russe, and Gymboree.

 

Retail: National Vacancy & Rent Trends 

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

 

Statistics by Metro

The gap between healthier metros and weaker ones has little changed in the quarter as 28 metros saw an increase in vacancy, down from 32 metros last quarter. Metros with the highest vacancy rate increase include Knoxville, Pittsburgh, Austin, Milwaukee, and San Bernardino/Riverside. Metros that saw the biggest decline in vacancy include Colorado Springs, Omaha, Suburban Maryland, Greensboro/Winston-Salem and Orlando. Rent growth was healthy in a number of metros as 13 saw rent growth of 1% or more in the quarter. Metros with the highest effective rent growth were San Francisco, Salt Lake City, Raleigh-Durham, Dayton, and Colorado Springs. However, sixteen metros posted an effective rent decline in the quarter including Chattanooga, Cleveland, Fairfield County, Louisville, and Little Rock. The retail employment statistics are somewhat consistent with these occupancy trends as 44 metros saw retail job losses over the last year led by New Orleans, New Haven, Norfolk, Pittsburgh, and Wichita. Some metros saw healthy growth, however, including Jacksonville, Charleston, Salt Lake City, Seattle, and Nashville.

 

Conclusion

As the retail sector continues to undergo restructuring, a number of retail real estate markets face more vacancies and falling rents. This pattern is expected to continue as more stores will close this year. At the same time, we continue to see stores opening in every metro. A number of other big box vacancies have been converted to self storage and/or sold to developers for redevelopment.

The bigger news of the day was the drop in retail sales at the start of 2019. While this sends a chill through the retail real estate industry, the underlying data shows that the drop in sales was found in food and beverage stores, building material stores and general merchandise stores – all of which may have been impacted by weather conditions. All of these categories show health year-over-year sales growth while other categories show year-over-year declines such as electronics stores, miscellaneous stores, and furniture stores. Restaurants saw strong sales growth in February and over last year. Netting out auto, gasoline and e-commerce sales from the total retail sales numbers (not including restaurants) shows that real estate-using retail sales declined 1.1% in February but has grown 2.3% over the first two months of 2018. In short, the retail real estate sector will likely see more gray skies ahead.

 

Note: Preliminary trends are subject to revision.
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