Retail Preliminary Trends, Q2 2019

Preliminary Trends Announcement: National Retail Market

 

Retail Sector Trends

The neighborhood and community shopping center retail vacancy rate fell to 10.1% in the second quarter. In Q2 2018, the rate had risen 20 basis points to 10.2% and had remained flat at that rate through the first quarter of 2019. The second quarter marks the first time in which vacancies have declined since the first quarter of 2016.

Both the national average asking rent and effective rent, which nets out landlord concessions, increased 0.4% in the quarter. Last quarter, asking rent grew by 0.4%, while effective rent grew by 0.5%. At $21.39 per square foot (asking) and $18.73 per square foot (effective), the average rents have both increased 1.7%, from the second quarter of 2018.

 

Neighborhood & Community Shopping Centers: National Vacancy & Rent Trends

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

 

The Regional Mall vacancy rate was flat in the quarter at 9.3%. The mall vacancy rate had jumped 0.5% in the third quarter of 2018 due to Sears store closings and it had continued to rise each quarter through the first quarter of 2019. Last quarter saw the vacancy rate rise a further 30 basis points to its current level of 9.3%, hitting the highest rate for mall vacancy since the third quarter of 2011. This came in the midst of a number of chains announcing major store closures, such as JC Penney, Payless, Charlotte Russe, and Gymboree. In the second quarter, vacancy for malls has remained flat and rent was up 0.2%.

The performance of both malls and neighborhood and community centers will likely be affected by the continuing store closures throughout the second half of the year, yet the stability of the
trends this quarter shows how the retail sector has been able to withstand structural changes in the industry, to some extent. As big-name anchor stores clear out, a number of stores continue to open. Grocery stores have been a leading new occupant of those vacant spaces over the past year or so, as have home/houseware stores,
gyms/fitness, discount variety stores, discount clothing stores, and even trampoline parks. Store openings have led to strong occupancy growth this quarter as net absorption outpaced new construction for neighborhood and community shopping centers. Net absorption for the second quarter was 2,416,000 SF, nearly double the previous quarter’s absorption of 1.29 million SF, while new completions measured just 1,491,000 SF.

 

Regional & Super Regional Malls: National Vacancy & Rent Trends

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

 

Statistics by Metro

The metro level statistics show fewer metros, 21 of 77, with an increase in vacancy for the quarter, down from 28 metros last quarter. Metros with the highest vacancy rate increase include Columbia, Charleston, Birmingham, San Antonio, and St. Louis. Metros that saw the biggest decline in vacancy include Chattanooga, Tacoma,
Colorado Springs, Greensboro/Winston-Salem and Columbus. Rent growth was healthy in a number of metros, as 8 saw rent growth of 1% or more in the quarter. Metros with the highest effective rent growth were Seattle, Nashville, Sacramento, Oakland-East Bay, and Louisville. However, nineteen metros posted an effective rent decline in the quarter including Little Rock, Kansas City, Omaha, Lexington and St. Louis. Four metros saw an effective rent decline for the year: Fairfield County, Ventura County, Hartford, and Cleveland.

 

Conclusion

As store closures continue to plague the retail sector, many still fear the “Retail Apocalypse.” Yet, the sector has so far been able to ward off the worst of the premonitions. This by no means indicates the sector is without ongoing challenges as a number of stores are still expected to close in the second half of the year and online shopping continues to offer stiff competition to brick and mortar stores. Older stores that are not keeping up with new business strategies or modernizing will likely continue to suffer and close in this tumultuous time. Still, the retail sector has been able to adapt to industry restructuring in a number of ways. Some stores have had success in adopting new business strategies in an effort to revitalize their brands.  On the supply side, empty big box stores have been converting to Self Storage or have been sold to developers for redevelopment, former shopping centers have been demolished and there has been a general slowdown in building within the sector. With minimal construction in the pipeline, vacancy rates were able to stabilize a bit this quarter, though the retail sector will likely see more fluctuation ahead.

 

Note: Preliminary trends are subject to revision.
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