Latest posts by Randolph Taylor (see all)
- Interest Rate Volatility and Trade War: Implications for CRE Investors - August 12, 2019
- Educate Network Sell Your Property – Multifamily Forums - July 30, 2019
- Small Business Optimism Signals Positive Real Estate Space demand - July 16, 2019
Stronger Retail Demand Rent Growth Seen Shifting to Second-Tier Markets
As Rents in High-End Districts Start to Moderate, Investors Widen Their Horizons to Include Strong Trade Areas in Secondary, Tertiary Markets.
The national vacancy rate for retail real estate in the U.S. edged down to 5.9% in the fourth quarter of 2015 after logging a healthy 20 million square feet of net absorption and setting the stage for rent growth in a growing number of shopping districts in the coming year.
Meanwhile only 12 million square feet of new retail space came online in the final quarter of 2015, culminating a moderated pace of shopping center construction last year that continues into 2016, according to data presented during the CoStar’s 2015 State of the U.S. Retail Market Review and Forecast.While retail construction remains at relatively low levels compared with previous cycles, the 70 million square feet of new shopping center space currently under construction across the U.S. is the highest level since the most recent recession, according to Suzanne Mulvee, director of retail research, who presented the outlook and forecast with Ryan McCullough, senior real estate economist.
Although the list of new retail projects includes 21 malls and five outlet centers, only 10 power centers are under construction, considerably less than in previous cycles.
However, the 86 grocery-anchored neighborhood centers under construction is a significant increase from the last couple of years, reflecting the growing strength of smaller independent in-line tenants. The increased confidence in grocery-anchored centers also reflects growing economic strength at the local level as the effects of the economic recovery continue to spread.
In somewhat of a change in pattern from the previous retail supply boom from 2006 to 2008 and earlier, developers do not appear to be focusing on building new shopping centers in far-out suburban locations in the path of anticipated housing and population growth. Rather than ‘chasing rooftops’ into the outer suburban fringes, builders are targeting more urban mixed-use infill projects, especially in such supply-constrained markets as New York City, Miami and Honolulu.
Between 1% and 1.5% of new retail inventory is currently under construction in these three markets, including major projects such as Miami’s Brickell City Centre, shopping centers near the World Trade Center and Hudson Yards in New York, and Honolulu’s International Market Place, opening this summer in Waikiki.
Meanwhile, other former high-growth retail markets that are not as supply constrained, such as Raleigh, Nashville, Houston and Charlotte, are seeing considerably less construction than the 2006-2008 cycle.
Year-over-year demand growth in 2015 was strongest in such markets as Dallas, Raleigh, Fort Lauderdale and Orlando, FL; and Austin, markets that have now shed their overhang of vacant store space from the last cycle.
Western U.S. markets enjoyed the strongest rent growth in the cycle so far, led by Honolulu at about 13% last year and a cumulative 50% over the course of the current cycle. San Francisco, which has seen little demand growth due to supply constraints, still enjoyed 10% rent growth in 2015 and 30% since the beginning of the recovery.
Later recovering Southern markets like Atlanta, which are now experiencing solid population and demand growth, are positioned to reap rent growth that has remained elusive so far due to the glut of vacant space from the last cycle.
“We’re going to see these markets start moving up on the rent growth spectrum this year,” McCullough said, adding that markets like with Nashville, Austin and even Houston are already seeing growth in the high single digits.
Houston, in fact, is seeing a much needed bright spot in its commercial markets, where office sector demand is being hit by the decline in energy prices and its effect on the local economy. Houston’s retail sector is holding up better because population growth has outpaced retail supply for so long that the market has actually seen less retail space built per capita than any time during the last 30 years.
“That’s really strengthened the retail market and helped insulate Houston from further economic shocks,” McCullough said.
Conversely, markets such as Washington, D.C. and New York City, which experienced strong retail growth earlier in the recovery, are now slowing. Rent growth in D.C., for example, fell from 7% in 2014 to under 2% last year. Midwest markets are similarly playing catch-up in both demand growth and rents.
Following a hot start early in the recovery, rent growth in the most well-heeled U.S. trade areas with at least $2 billion in spending power within a three-mile radius has slowed considerably in recent quarters.
“In some of the premier retail districts around the country, while we would anticipate good rent growth, I don’t think it’s going to be as explosive as what we’ve seen in the past,” McCullough said.