Retail Preliminary Trends, Q4 2018

Preliminary Trends Announcement: National Retail Market

 

Retail Sector Trends

The neighborhood and community shopping center vacancy rate was flat in the quarter at 10.2%. At year-end 2017 it was 10.0%, while at year-end 2016 it was 9.9%. Both the mall sector and the neighborhood and community shopping center sectors have seen significant volatility over the last year but the statistics were little changed in the fourth quarter. Given the many store closures across the U.S., the minimal changes in vacancy rates show how the retail sector has withstood the structural changes in the industry.

The national average neighborhood and community shopping center asking rent and effective rent, which nets out landlord concessions, both increased 0.4% in the fourth quarter. At $21.21
per square foot (asking) and $18.57 per square foot (effective), the average rents have increased 1.6% from the fourth quarter of 2017, well below the rate of inflation: 2.5%.

Net absorption was low in the fourth quarter: 1.4 million square feet, down from 2.6 million in the third quarter. Likewise, construction was also low at 1.9 million square feet but in line with
the average of the previous quarters: 2.0 million square feet. In 2017, construction averaged 3.6 million square feet per quarter.

 

Neighborhood & Community Shopping Centers Vacancy & Rent Trends

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

 

Statistics by Metro

Vacancy increased in 32 of 77 metros in the quarter; effective rents declined in 15 metros. For the year, 51 metros have higher vacancy and three show a rent decline. For most metros, the vacancy increase was due to negative net absorption: 33 metros saw negative net absorption in the quarter, up from 25 in the fourth quarter of 2017. Metros with the highest vacancy rate increase in the quarter include Syracuse, New Haven, St. Louis, Rochester, and Fairfield County. Metros that saw the largest drop in vacancy include Omaha, Wichita, Dayton, Orlando, and Charleston.

Although 15 metros posted a rent decline in the quarter, the gap between stronger metros and weaker ones has narrowed over the last year. One year ago, 21 metros posted a decline in the last quarter and the declines were steeper than in the recent quarter while the gains in the top metros were also higher than this last quarter. Metros that had the highest rent growth in the recent quarter were Orlando, Raleigh-Durham, Austin, Richmond, and Lexington. Metros with the biggest declines were Albuquerque, Salt Lake City, Cleveland, Louisville, and Oklahoma City.

For the year, three metros show a year-over-year rent decline: Albuquerque, Central NJ, and Tampa-St. Petersburg. Metros with the highest rent growth over the year include Tacoma, San Jose, Orlando, Austin and San Francisco – all with rates of 2.9% to 4.3%.

Despite losing jobs in five of the last 11 months, the Retail sector shows a year-over-year gain of 50,700 jobs as of November, a growth rate of 0.3%. At the same time, the restaurant industry added 222,000 jobs over 2017, a growth rate of 1.9%. There still remains a sharp divide between the strong and weaker metros, however, as 29 of 77 metros shed retail jobs in the year led by Wichita, Fairfield County, Pittsburgh, and Chicago – all with losses of 2.0% to 5.2%. Metros that added the most retail jobs in 2018 were Seattle, Louisville, Jacksonville, Tacoma, and Denver posting growth rates above 3.5%.

 

Regional & Super Regional Malls Vacancy & Rent Trends

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

 

Conclusion

Many may recall that the store closure announcements for Sears, Kmart, JC Penney, et al dominated the news at the end of 2017. Many feared that vacancy rates would soar and rents would
plummet. This did not occur as the doomsday prognostications proved to be overblown. That said, a number of stores are still expected to close in the coming months and the industry continues to face a number of headwinds including gains in on-line shopping.

At the same time, inventory growth has been minimal. Not only are developers not building new retail, but a number of former shopping centers have been demolished. At the same time, some empty big box stores attached to shopping centers have been converted to self storage facilities or other uses. Our raw data shows that some of the biggest tenants leasing space of late include fitness companies, trampoline parks, and grocery stores.

In short, the structural changes in the retail sector are still underway as older stores that have not refreshed their look or kept up with the fashion trends will continue to suffer and close. That
said, if the retail sector was able to sustain the store closures over the last year, it can survive anything. With minimal construction in the pipeline, vacancy rates are expected to hold steady in the coming year while rent growth should continue to stay positive but below the rate of inflation.

 

Note: Preliminary trends are subject to revision.
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