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Retail Recovery Reveals New Trends

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10-25-2016 07:07

Q3 2016 U.S. Market Update

Over the past two years, we have seen many trends cropping up for the retail sector’s current recovery. Chief among them, the disparity between malls and neighborhood and community centers. And within the mall subsector, a disparity between Class A malls and everything else. In addition, it has been established that this recovery is much more gradual than any we have seen before, in part due to the rise of e-commerce, experiential retail and a rise in non-traditional tenants. “In short, the retail market faces greater challenges from structural changes than from cyclical issues,” according to REIS’ Q3 Preliminary Retail Trends Report.

Nationally, REIS reported that the vacancy rate for malls declined to 7.8%, whereas the vacancy for neighborhood and community centers increased to 10% in Q3 2016. “For the second straight quarter, the two retail subtypes see-sawed in opposite directions,” said REIS. Despite a plethora of store closings this year (totaling 12.8 million SF nationwide), malls are still the top performer because of the performance of Class A malls. The National Real Estate Investor did an analysis of the “Impact of Large Chain Store Closures on Retail Rents.” According to the analysis, the number one takeaway was that, “the closures may have impacted these metros, but there is no overall conclusion that can be drawn from the data.” And, interestingly, when compared to metros with no store closures, the data “suggests that the same factors that led to the store closures – oversupply, sluggish economic growth – impacted rent growth more than the actual closures themselves. 

For neighborhood and community centers, net absorption was “especially weak” in Q3, at 143,000 SF, this is the lowest level since 2011 when it was negative. However, this “was likely a delayed response to the tepid economic condition in the first quarter.” New construction totaled 2.53 million SF, which is surprising considering the stalled vacancy rate, but still “far below construction levels observed during prior recoveries.” Asking and effective rents for neighborhood and community shopping centers both grew by 0.4% in Q3. Asking rents had climbed 0.4% in the second quarter after increasing 0.5% in the previous three quarters. On a year-over-year basis, asking and effective rents have grown by 1.9%, decelerating from previous annual growth rates that were above 2%. Without a meaningful drop in the vacancy rate, we can expect this slow rate to persist for the next few quarters. Asking rents for regional malls grew by 0.5% during Q3 and 2.1% year-over-year.

Even though the retail landscape has changed, the economy is doing well. “With job growth and gains in median family incomes across the U.S., the retail recovery should continue,” reported REIS. Indicators such as consumer confidence, job growth and retail spending are all positive. The Conference Board Consumer Confidence Index® which had improved in August, improved further in September and now stands at 104.1. In September, 156,000 jobs were created and the unemployment rate was “little changed” at 5.0%, according to the U.S. Bureau of Labor Statistics. The average national monthly job growth from June through August was 232,000, and of that, 75% was in the REIS 82 metros. The most recent estimates from the U.S. Census Bureau indicate retail sales in August 2016 were $456 billion, a 1.9% increase from August 2015. Total sales for June - August 2016 were up 2.4% from the same period a year ago.

It looks like these trends may be permanent features of the retail sector today and with them comes a new kind of recovery.

Bull Realty, Inc., Research