Although retail segment fundamentals remain dismal across the nation, there are a few bright spots—markets that are enjoying strong absorption, minimal vacancy, and increasing rental rates.
“Some of the markets that are in the best shape are in the southwest, particularly Texas,” notes Peter Muoio, PhD, chief economist and executive vice president for Auction.com Research and New York City-based research firm Maximus Advisors. “Several coastal markets, both East and West, are also doing quite well.”
So what makes these markets stronger than others? In Texas, it’s the strong housing and job market. And in the coastal markets, it’s a combination of constrained supply, a plethora of wealthy residents, and an improving economy.
Although consumers have become more optimistic and retail spending has increased—surpassing the pre-recession peak in inflation-adjusted dollars—retail absorption remains extremely weak, vacancies remain very high, and rents remain tepid, according to a recent Auction.com Research research report.
“The lull in the housing recovery is bad news for retail, as it dissipates the small lift the sector was receiving from that source,” Muoio says, adding that his firm is becoming concerned that a new paradigm for retail is upon us. “Bricks and mortar retail chains remain under extreme pressure from e-retail. The pressure is not just in the form of lost sales but also in margins, as they compete intensely to retain shoppers from alternative distribution channels.”
The retail fundamentals data from Reis continue to show stagnation. The New York City-based real estate research firm reported a mere 840,000 square feet of retail space absorbed in the first quarter. Most of the absorption in recent years has simply been associated with leasing of the limited amount of new space that is being completed.
Retail vacancies dipped 10 bps to 10.3 percent in the second quarter, just 80 basis points below the peak reached in the aftermath of the recession fully 11 quarters ago. Effective retail rents are also moving glacially, increasing another eight cents per foot in the most recent quarter, bringing them up just 1.8 percent over the past year. Retail rents stand 3.4 percent below their nominal peak.
Recognizing the continued pressure on retailers, Auction.com Research has adjusted its forecast. The firm has slowed its projected pace of absorption recovery through 2015, despite a generally better macroeconomic picture.
Developers, meanwhile, continue to move forward with their projects. As a result, Auction.com Research projects a vacancy rate of 8.7 percent in 2017, compared to cyclical lows around 7 percent in previous cycles. The firm expects rents to finally surpass the peak level of $17.57 per square foot in 2016, nearly a decade later.
Top retail markets
Austin’s retail market remains robust as strong absorption amid a lack of supply continues to drive down vacancies. Vacancy rates peaked at 9.5 percent following the recession, according to Reis, but now measure 320 basis points below that. Effective rents are rising as well, increasing more than 3 percent from a year ago due to the tightening market. Auction.com Research expects that vacancies will continue to fall this year and next, reaching their cyclical trough in 2015 in the mid-4 percent range.
Boston’s retail market got through the recession relatively unscathed, with vacancies peaking at just 7 percent, according to Reis. Currently they’re tracking in the mid-6 percent range, and effective rents are seeing good growth, rising 2.7 percent from a year ago. Auction.com Research expects demand to remain solid, although the market faces a large supply pipeline. The firm anticipates rents will continue to grow around their current pace, averaging 2.6 percent per year.
Houston’s retail market is one of the strongest in the nation; its strong local economy is generating robust retail absorption. Vacancies peaked during the recession in the mid-13 percent range, but have fallen below 12 percent, according to Reis. Effective rents are currently at an all-time peak and growing nearly 3 percent annually. Going forward, Auction.com Research expects the strong demand to continue, bringing vacancies down to 10 percent in 2017, their lowest level since the mid-2000s. Effective rents will continue seeing strong gains, averaging growth of 3.2 percent per year.
Demand for retail space in Orlando is strong. Vacancies have fallen from their cyclical peak of 14 percent to just above 12 percent, according to Reis. Rents, meanwhile, have grown 2.5 percent from a year ago. Some supply additions remain this year, which will keep vacancies close to 12 percent. Effective rents will accelerate as the market tightens further, according to Auction.com Research, averaging 3.2 percent growth per year.
San Diego’s retail recovery is in full swing. With no new supply in the first quarter, demand brought vacancies down to 6.2 percent, according to Reis. Auction.com Research expects vacancies to slowly descend over the next few years, dipping below the 5 percent mark by 2017 as demand heats up. Effective rents have increased in nine of the past 10 quarters, growing 0.4 percent from the fourth quarter and 1.8 percent from a year ago. Effective rent growth should accelerate over the next four years, averaging growth of 3 percent.