Consistent demand, low supply and supportive economic trends continued to improve fundamentals in the U.S. retail market through the third quarter, according to the Q3 U.S. Retail MarketView report by CBRE.
The national availability rate for all retail properties declined to 8 percent in the third quarter — a 10 basis point drop from the second quarter, standing only 100 basis points above its 2006 low.
Demand for space from food services and drinking establishments, smaller-format grocers, and healthcare and medical users remains very strong, while sales volume at department stores and mid-market general merchandisers has come under pressure. These new tenants are driving demand and diversifying the tenant base of many malls and shopping centers, and enhancing the attraction of retail destinations, according to CBRE.
Despite early indications of lower GDP growth in the third quarter, U.S. employment levels continued to grow steadily and the outlook for economic growth is favorable. The forecast for 2016 is consequently very positive, with retail sales growing at their fastest pace since 1999.
The decline in gasoline prices, a tightening labor market and increasing upward pressure on wages and income are supporting U.S. consumer activity in the market today. Year-over-year growth in nominal wages and salaries has averaged 4.6 percent over the past four quarters, compared to an average of 4.1 percent since the first quarter of 2011.
Automobile, sporting goods, hobby and food service retail segments are all performing at a significantly higher level than clothing and accessory stores and general merchandisers, which have performed poorly compared to levels seen in 2010 through 2012.
Room for Demand Growth
Demand has remained consistent, but lackluster, with slightly less than 20.4 million square feet of retail space absorbed on net in the third quarter. This nearly mirrors the three-year quarterly average of 20 million square feet. While this level is consistent, it is far below the 28 million square feet averaged between 2005 and 2007.
Neighborhood and community strip centers saw the strongest demand among major retail segments in the third quarter. Demand at power centers, lifestyle centers and malls have been somewhat weak all year, with only 908,000 square feet absorbed in the third quarter.
Total retail demand was strongest in New York, Atlanta, Chicago and Riverside in the third quarter, exceeding 1 million square feet in each of these metro areas. San Jose saw the weakest demand, due to 1.1 million square feet of negative absorption in lifestyle centers and malls.
The metros with the strongest demand, year-to-date, are Dallas, Fort Worth, Charlotte and Raleigh.
Total retail completions remain far below average on a historical basis, but the construction pipeline has reached its highest level since 2008, according to the report. Completions have totaled 50.2 million square feet over the past year — the most since 2012’s 36.5 million square feet.
While the construction pipeline is growing, it remains well below 2007 levels with 40.7 million square feet of new retail space under construction in the third quarter. Among the major retail segments, lifestyle centers and malls saw the most development as a percentage of existing inventory.
New York, Boston, Miami and Fort Lauderdale are all cited as development hotbeds in the U.S. retail market.
Over the past four quarters, 6.3 million square feet of lifestyle center and mall space has been delivered, marking an increase of 50 percent over the 2011 low of 4.2 million square feet.
Supply of neighborhood, community and strip centers has increased modestly, but development remains well below its pre-recession pace.
Availability Declines, Rents Escalate
In the third quarter, the national availability rate for all retail space declined for a second consecutive quarter in a 10 basis point drop to 8 percent, marking the lowest of the recovery.
Of the major retail segments, power centers continue to have the lowest availability rate in the country, with a national availability rate in the third quarter of 5.9 percent.
Metros with the greatest declines in availability in 2015 to date include Charlotte, Seattle, Atlanta, Austin, Dallas and Denver. The tightest markets in the country are San Francisco, Miami and Honolulu — all exhibiting availability rates of less than 5 percent.
Total net rents matched their fastest year-over-year growth since the beginning of the recovery in the third quarter, with the average asking rent for all retail space increasing by 0.7 percent from the second quarter to $15.68 per square foot. This is the highest level since 2011.
Rising rents can be seen across all major retail segments, with greater gains for lifestyle centers and malls, which recorded growth of 3 percent over the past year.
Prime rents, generally representing the nation’s luxury shopping districts, are moderating after years of growth, with prime rents from 12 U.S. metros registering a growth of 2.6 percent in the third quarter over their year-earlier rates.
The improvement in retail market fundamentals is expected to accelerate in the fourth quarter, with positive momentum building in 2016 and 2017. CBRE predicts this improvement will spawn some of the strongest rent growth ever experienced in the U.S. retail market.
Continued demand increase, low supply and favorable economic trends will continue to drive retail growth in the coming year.
The specter of a disruptive reaction to higher interest rates remains a larger risk that may dampen this optimistic outlook, according to the report.
Among neighborhood, community and strip centers in the U.S., demand is forecasted to rapidly accelerate in the fourth quarter and remain strong.
New supply of neighborhood, community and strip center space is expected to remain subdued over the next two years, with fourth quarter completions projected to increase to 5.2 million square feet.
Strong demand and low near-term supply additions are expected to continue to lower the national availability rate for neighborhood, community and strip centers into 2018, at which point availability is projected to reach a cyclical low of 8.3 percent for the retail segment, with rents continuing to grow considerably over the next several years.
— Katie Sloan