The country’s retail sector has been mired in a slump for much of the last year. Our research at Ten-X shows the sector continues to recover as labor markets have improved, household wealth has recovered from the housing bust and financial crisis and confidence has returned to normal. However, the segment faces a major hurdle, as consumers continue to change where and how they spend their money.
More and more, shoppers are spurning traditional retail in favor of e-commerce outlets such as Amazon. Ten-X research indicates 13.0 percent of all retail sales are now conducted online—a share that is increasing at an accelerating rate and one which we expect to climb further in the years to come. This has impeded demand for retail space. Additionally, consumers have redirected more of their spending to experiences and away from many products traditionally sold in retail stores. However, the very low level of new retail construction means that absorption will outpace new supply over the next two years. The result will be a continued slow recovery in vacancies in the near term.
Markets with the most potential for retail assets tend to be fueled by robust local economies, with a steady influx of new residents who are able to find jobs and fuel overall growth. Here are the five specific markets where we think that investors should consider purchasing retail properties.
Peter Muoio serves as chief economist with Ten-X, an online real estate marketplace.
Austin’s economic fortunes continue to soar, making it an ideal spot for retail investment. Local employment has grown between 3.0 and 5.0 percent over the last five years and shows no signs of slowing, while population growth has more than tripled the national rate for more than a decade. Coupled with a thin supply pipeline, strong demand for retail in the area is poised to drive vacancies below 5.0 percent by 2018, and rents are expected to rise by more than 4.0 percent over the same period.
Burgeoning leisure and hospitality industries have been powering Miami’s swift recovery from the recession, helping to push overall employment to an all-time peak. While unemployment is still hovering slightly above the national rate, it has dropped drastically from its pre-recession peak. The city’s retail sector has been thriving, with rents climbing more than 4.0 percent over the last year. Vacancies are expected to dip as low as 4.0 percent by 2018, and a dearth of supply additions on the horizon puts buyers in a position to capitalize on the strong market.
Retail conditions are also inviting in Miami’s neighboring city to the north, Fort Lauderdale. Though vacancies and rents have been mostly stable over the last year, a steady stream of supply is expected to dry up in the near future, pushing the market sharply in the right direction. The city’s recovery from the recession has been robust, and unemployment is currently just above 4.0 percent—well below the national average. Ten-X Research data indicates strong population growth and job projections are likely to set investors up for annual net operating income (NOI) growth of about 4.2 percent through 2020.
The third South Florida city to make the ‘buy’ list, West Palm Beach is benefitting from escalating population growth and steadily increasing employment numbers, each of which outpaces national averages. Retail demand is strong enough to withstand healthy additions to supply, and Ten-X Research forecasts that it will pull vacancies below 7.0 percent by 2018. Rents should continue an accelerating growth pattern over the same period, and steadily improving fundamentals show NOI will continue to grow at close to 4.0 percent.
The surging tech sector in and around San Francisco continues to make the city a solid bet for investors. Employment has taken off since the recession, with job growth averaging higher than 4.0 percent per year and unemployment hovering just above 3.0 percent. Coupled with an empty supply pipeline, the continued boom could lower vacancies to 1.9 percent by 2018—a historical low. While overreliance on a single sector can make a metro market particularly volatile, data suggests rents are poised to climb in the coming years, pushing NOI up roughly 3.2 percent each year.
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