One fact that usually gets lost in the recent flow of news about store closures is that none of it is unusual. Retail concepts come and go all the time. Economic cycles and changes in consumer tastes all but guarantee that a retail concept that reigns supreme at one point in its lifecycle could very well file for bankruptcy or liquidate several decades later.
Still, the retail real estate sector accounted for $76 billion in investments at the end of 2016, according to Anjee Solanki, the U.S. national director of retail services at real estate services firm Colliers International. Major gateway cities like Atlanta, Los Angeles and New York often attract investor interest first, but experts point out that secondary markets offer just as many prospects for investors looking to put their money to work.
For investors, the economic outlook for 2017 looks mixed: varying estimates have the GDP growing between 2.1 percent and 2.5 percent in 2017, and wages are also expected to increase. The labor market is expected to tighten, as the economy is expected to create 2 million new positions in 2017, down slightly from the 2.2 million new jobs filled in 2016, according to the “2017 U.S. Retail Investment Forecast,” from Marcus & Millichap, a commercial real estate brokerage firm based in Calabasas, Calif.
Marcus & Millichap estimates that store openings among value- and service-oriented retailers could result in about 81 million sq. ft. of net absorption. Developers are expected to complete about 49 million sq. ft. of retail projects this year. That is a significant amount of development, but much lower than the estimated 225 million sq. ft. of new construction that the industry used to complete each year through 2007, says Bill Rose, a first vice president and national director of Marcus & Millichap’s retail group. Restrained new construction means the industry could see its vacancy rate drop to 5.1 percent.
Where does that leave retail real estate investors in 2017? Where should they look for acquisitions to get the best return on their investments?