The retail real estate market is on track to thrive
Many feared that the growth in e-commerce was a death knell for bricks-and-mortar retail stores. Then the
strong year-end 2017 sales reports from leading retailers, along with the retail sales numbers from the U.S.
Census Bureau, showed that many of those fears were overblown.
Consumers had plenty of disposable income and still liked to shop and buy things. Still, more big-box retailers
such as Walgreens and Toys R Us continued to report plans to close stores, while Sears reported that sales fell
at the end of the year.
So, how does one sift through the anecdotal and government statistical reports to decipher how the retail real
estate market is faring? First, it helps to dig deep into the details on the national sales reports to see how retail
sales outside of e-commerce performed.
Second, recognize that the national
numbers represent an average growth,
balancing out the strong metros that are
far outperforming others.
Real estate-using (REU) retail sales
— retail and restaurant sales less
automobile, gas and e-commerce sales
— climbed 4.1 percent year over year
this past fourth quarter, the strongest
quarterly rate since first-quarter 2015.
Prior to this past fourth quarter, the
year-over-year REU retail-sales growth
rates ranged between 2 percent to
2.9 percent — from first-quarter 2016
to third-quarter 2017. While lower than
overall retail sales growth that includes
e-commerce, this pace of growth was
healthy, indicating that the retail landscape has withstood the adjustments
from store closures.
To that point, the overall retail vacancy rate for neighborhood and community shopping centers held steady at
10 percent in fourth-quarter 2017. The vacancy rate has held at that level for the last three quarters, up from a low
of 9. 8 percent in second-quarter 2016. More importantly, rent growth has been positive, jumping 0.5 percent this
past fourth quarter. For the year, retail rents grew by 1.8 percent.
The retail market has sustained the impact from store closures largely because developers have been slow to add
space after overbuilding in the 1990s and early 2000s. New retail completions totaled 21. 7 million square feet in
2017, down from 22. 8 million square feet added in 2016. In 2007, in contrast, developers added 33. 3 million square
feet of retail space.
Looking at the metro level, markets that saw strong rent growth in 2017 include Miami, Salt Lake City, Seattle,
Denver and Oakland, California — all of which saw annual rent-growth rates of 3. 7 percent to 4. 8 percent. At the
same time, as many as nine metros saw a rent decline during the year, including Tucson, Arizona; Oklahoma City;
Chattanooga, Tennessee; and Providence, Rhode Island.
The national employment statistics on retail have received considerable attention, as the industry incurred a
loss of 66,500 jobs in 2017. The restaurant industry, however, added 248,600 jobs in 2017 — more than offsetting
the loss in retail. The personal-services industry that includes businesses that rent retail space, such as hair and
nail salons, dry cleaners and pet services, added 48, 100 jobs in 2017 while fitness centers (gyms) added 8,900 jobs.
Gyms were one of the biggest lessors of retail space in 2017.
Thus, the numbers show that the retail estate market has endured the threat of both the surge in e-commerce
as well as the closing of stores. Although the industry faces continued headwinds on both of these fronts, the
success of the industry in 2017 should reassure market observers that consumers still like to shop in tangible
retail space, and that the retail real estate market should thrive as the economy continues to expand. n
U.S. Retail Real Estate Market
By Victor Calanog and Barbara Byrne Denham
Barbara Byrne Denham is an economist in the research and economics
department at Reis Inc. She previously
served as chief economist at Eastern
Consolidated and is a Ph. D. candidate
at New York University, where she
has studied economics, monetary
theory and game theory. Reach her
Victor Calanog is chief economist
and senior vice president for research
at Reis Inc. ( www.reis.com). He writes
a monthly column on property types
for Scotsman Guide. Calanog and his
team of economists are responsible
for data models, forecasting, valuation
and portfolio services for clients in
commercial real estate. Reach him
Source: Reis Inc.
Retail vacancy rate Quarterly retail-rent growth