By Victor Calanog
VICE PRESIDENT OF RESEARCH AND ECONOMICS, REIS INC.
re Tail recovery remains consis TenT buT unimpressive
General economic news would suggest that consumers have weathered the one-two punch of higher taxes and spending cuts from the first half
of 2013 relatively well. Retail-sales growth, although inconsistent, has generally remained positive. These favorable indicators are not translating into significant or consistent absorption of neighborhood and community shopping-center space, however. The limited demand that exists
is primarily for smaller units of less than 5,000 square feet, although landlords continue to have a more difficult time leasing larger boxes. As a
result of these market headwinds, the U.S. second-quarter vacancy rate declined by just another 10 basis points, marking the sixth time in the
past seven quarters that the vacancy rate fell by 10 basis points.
The market is proving to be consistent if not spectacular in its recovery. The vacancy rate has declined by 30 basis points year over year.
The drag on economic growth from fiscal policy and higher interest rates is dampening demand for retail space that might be accelerating
otherwise in response to reasonable levels of employment growth and new
household formations. It likely will be late this year at the earliest before the
economy surmounts these impediments and creates the opportunity for a
faster pace of vacancy-rate reduction.
Although the outlook for neighborhood and community shopping centers may
not be as bleak as it was a few years ago, it is important to recognize that the
current U.S. vacancy rate is just 60 basis points below the sector’s all-time high
of 11.1 percent set in 1990 and third-quarter 2011, and the vacancy rate remains
well above the cyclical trough of 6. 7 percent set in second-quarter 2005.
Asking and effective rents grew by 0.3 percent this past second quarter,
a pace essentially unchanged from this past first quarter and representing
the seventh consecutive quarter that both asking and effective rents have
increased. The combination of the current level of vacant stock and a net
absorption rate insufficient to exert meaningful downward pressure on avail-abilities continues to translate into a glacial pace of rent growth, however.
The top 12 markets ranked by highest average effective rent are located in
California, the New York suburbs, and the Washington, D.C., suburbs. These
are all affluent metro areas, providing relatively strong demand for consumer
goods. Moreover, these locations as coastal markets create constraints on
new construction, which helps to keep new supply in check. Conversely, contracting industrial economies, such as Indianapolis and the Ohio towns of
Cleveland, Columbus and Dayton, continue to have some of the highest vacancy rates because of weak demand for consumer goods and retail space.
Quarterly rent growth remains idiosyncratic. The markets that experienced
the strongest effective-rent growth this past second quarter were a diverse
group, including high-rent, affluent markets like Long Island, N.Y.; Fairfield
County, Conn.; and San Jose, Calif.; but also including Louisville, Ky., and Pittsburgh, not often thought of as particularly dynamic retail markets. In many
markets where the demand for space remains weak, a relatively small number
of new leases can have an outsized impact on metro-level rent growth (
especially in smaller metropolitan areas). Intimating that the stabilization and
modest recovery of the retail sector is becoming more pervasive, 66 markets
posted positive effective-rent growth this past second quarter versus 50 markets with positive rent growth this past first quarter.
Outlook for the second half
The outlook for the remainder of this year remains muted. There is some optimism given the underlying resurgence in the economy that the labor
market will perk up following some recent weakness. Second-quarter gross-domestic-product growth was revised up to 2. 5 percent, indicating
the economy has performed better than recently thought. In addition, data on manufacturing and auto sales point to a more upbeat assessment
of the U.S. economy.
Employment figures still have been lackluster, however. This past August’s payrolls came in below expectations, and downward revisions were
made to June and July figures. In fact, July’s revised payroll increase was the lowest monthly figure since June 2012. So although consumers have
fared relatively well, discretionary spending is restrained by weak employment and wage growth. An escalation of payroll gains and earnings
growth will be needed before retailers are comfortable leasing space at a faster clip.
For neighborhood and community centers, net absorption and new construction are anticipated to increase slightly in the latter half of this year.
These increases will be modest, however, and a significant amount of the net absorption will stem from preleased space in newly completed
projects. Demand for older space is projected to remain near historically low levels as tenants continue to prefer newer projects. Consequently,
vacancy is expected to contract only marginally by roughly 20 basis points through the end of the year. Rent growth is not likely to accelerate,
and concessions will remain in place this year because of the still-elevated vacancy rate.
Victor Calanog, vice president of research and economics at Reis Inc. ( www.reisreports.com), writes a monthly column on property types for Scotsman Guide. He and his team
of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at email@example.com.
brad doremus, senior analyst for Reis’s economics department, contributed to this article.
Source: Reis Inc. Vacancy rate Net absorption
RETAIL NET ABSORPTION AND VACANCy
Source: Reis Inc.
NEIGHBORHOOD AND COMMuNITy
SHOPPING CENTER EFFECTIVE RENT GROWTH