Demand for Commercial Retail Space Remains Stagnant

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Sponsored by Ten-X, Inc.

By Peter Muoio

As the first half of 2019 comes to a close, the retail segment remains flat across the country, largely due to continued pressure from e-commerce and shifts in consumer spending, which have resulted in a high and stagnant retail vacancy rate. 

According to Ten-X Commercial’s recent Retail Market Outlook, retail vacancy rates have stagnated at 10.2 percent since 2018 and are projected to remain around this elevated level through the rest of the year and into 2022. The high retail vacancy rates can be attributed to reduced demand for space due to store closures in the face of e-retail competition, as well as the need for smaller store footprints. Classic anchor retailers such as Sears, JCPenney and Neiman Marcus have been hurt by the rise in e-commerce, as online sales continue to gain market share once owned by brick and mortar retailers.

Effective rent growth has also stalled in the upper-1 percent range for the past two years, while the most recent quarterly effective rent growth remained at 0.4 percent, a slight 1.6 percent gain from a year ago. 

Despite increasing e-commerce activity, commercial real estate investors remain active in the retail sector. Many retail property buyers appear to be looking for redevelopment and repositioning investments. For example, Seritage Growth Properties purchased 235 Sears stores in 2015, converting the vacant spaces into offices, apartments and restaurants. 

Investors are also using Ten-X to search for retail opportunities. Retail properties listed on the transaction platform have had an influx of activity since the beginning of 2019. In March, average visits to Ten-X retail listings were up 24.4 percent from a year ago, even as sector fundamentals have been weak and stagnant. Furthermore, interested buyers viewing the secure document vaults hit a three-year high in the first quarter of 2019—marking a 53 percent increase in the number of visitors compared to the same time last year. 

Despite continued weakness in the overall retail sector, investor sentiment is stronger than it was last year. Given the trend toward retail repositioning and development, investor activity in the sector could remain strong even as fundamentals struggle. 

For spring 2019, Ten-X identified Austin, Texas; San Francisco; Dallas; Salt Lake City, Utah; and San Antonio, Texas as the top five investment markets for retail real estate —or the top ‘buy’ markets. These markets have all posted rent gains and lower vacancy rates. Overall, the Southwest region exhibits better buyer demographics and stronger economies, which provide a boost to traditional retail.

Meanwhile, Milwaukee, Pittsburgh, San Francisco, Northern N.J., Philadelphia and Memphis, Tenn. have been classified by Ten-X as the top five ‘sell’ markets—or areas where investors should consider selling their assets. These cities have suffered from weak rents and higher vacancy rates and will likely struggle through 2022. 

While the rise of e-commerce is hurting brick and mortar retailers everywhere, some areas of the retail market are holding up better, as retail deal volume has increased in the south and southwest metros. 

Heading into the second half of 2019, retail fundamentals will likely remain under pressure, while investors continue to search for creative re-use of retail properties. 

Peter Muoio_Headshot.jpgPeter Muoio is the chief economist and head of data insights at Ten-X where he heads a team that provides data insights to senior management, the sales, broker and buyer channels of Ten-X, marketing and product, as well as Ten-X clients using data generated by bidding on the Ten-X platform, Ten-X web site usage and external economic and real estate data.

Learn more at www.ten-x.com.

 

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