RETAIL SECTOR HOLDS THE LINE IN Q1

The US retail property market kept pace in Q4. Vacancy and construction activity were relatively unchanged, rents rose modestly and net absorption remained solidly in positive territory. Even though the numbers point to market consistency, the retail industry continues to experience significant change as traditional department stores struggle to adjust to the massive challenge presented by growth in online sales and the demographic shift from baby boomers to millennials.

 Sporting goods operators Sport Chalet and Sport’s Authority shuttered all their stores in 2016, as did women’s apparel giant The Limited, which will remain in business as an online-only retailer. But there was more bad news for national chains in the first quarter, as another 11 name brands filed for bankruptcy protection, including Eastern Outfitters, Wet Seal, Gander Mountain, HHGregg, General Wireless Operations (Radio Shack) and Payless Shoe Source. While reorganization eff orts are ongoing, some retailers may end up in liquidation if their reorganization plans come up short.

 Store closings have also become a much larger problem for mall owners. Major department stores announcing big store closure plans this year include Sears Holdings (160 Sears & Kmart stores), JC Penny (138 stores) and Macy’s (68 stores). Mall-based chains are also closing stores, including Abercrombie & Fitch (60 stores), American Apparel (110 stores), Wet Seal (171 stores), Crocs (160 stores) and Guess (60 stores). Most of the struggling retailers point mainly to increased online competition for their woes. More bad news is expected, as experts keep adding other big name retailers to the list of those who may not make it through the year.

 The vacancy rate was unchanged in Q1 at 4.8%, but it has fallen 20 basis points in the past four quarters. But, reported vacancy in secondary submarkets ranges much higher. General retail (freestanding, general purpose properties) maintains the lowest vacancy of all retail property types, followed closely by malls and power centers.

 Shopping center (neighborhood, community and strip centers combined) rates are still highest, but excess supply in this category remains concentrated in unanchored centers in traditional suburban submarkets that generally have a higher concentration of local tenants on their rent rolls. 

 Urban areas continue to account for a greater share of net absorption as retailers continue to shift their marketing focus onto millennial consumers. This group prefers multifamily housing near public transportation, trendy restaurants and cool bars over the suburbs they grew up in. They are more inclined to rent than own their homes, prefer public transportation over car ownership and like being close enough to work and amenities to walk. As a result, mixed use projects near public transportation tend to have the lowest retail vacancy. 

 Q1 net absorption topped 13.6 million square feet in the first quarter, bringing the net gain in occupied space in the last four periods up to just over 134 million square feet. The general retail category accounted for the biggest slice of that gain, followed by the shopping center category and then malls. Power center absorption has been light in the past year, which is indicative of several current trends in retailing: department stores closing, big-box retailers reducing store size and count and the shift to urbanized areas with the most millennial population growth.

 The overall average asking rate still managed another increase in Q1, up another $.29 to $16 per square foot. Over the past four quarters, retail rents across all product types and locations moved up by just over 3.3%, but rent gains are generally steeper in urban locales. Suburban retail centers, especially those that are not grocery-anchored, continue to see weaker growth, higher vacancy and the need for landlord concessions to secure new leases. The rate of rent growth suffers as distance from urbanized cores increase, which reflects the ongoing shift in lifestyle priorities.

 New deliveries for the quarter topped 18 million square feet, down from 24 million square feet in the previous period. In the past four quarters, 85 million square feet of new space has been added to the base inventory, which now stands at 13.15 billion square feet. Another 86.7 million square feet currently under construction, up 9% over Q4 of 2016.

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