Retail Forecast Remains Cloudy
The retail sector will likely continue to stagnate, largely due to secular trends in technology and consumer behavior that stand in the way of significant growth, reported Ten-X, Irvine, Calif.
“Consumers have been turning away from traditional retail for years, which is creating a more challenged and fraught landscape for investors,” said Ten-X Chief Economist Peter Muoio. “While healthy economic conditions and strong housing markets are fueling the sector in some areas of the Southeast and the West regions, even those regions would bear the brunt of weakening absorption and falling rents that could push vacancies to recession-era levels in the event of any cyclical economic headwinds.”
Muoio called the problems inhibiting retail’s growth “anything but a passing phase” and said the mounting shift toward online shopping “ensures the sector will continue to face a steep climb on its road to recovery.”
But the retail sector’s stagnation varies by market, Ten-X reported. The long-term forecast reveals Miami, Fort Lauderdale, Fla., Houston, Austin, Texas and Tampa, Fla. as markets in which investors should consider buying retail assets, the report said. “These markets, concentrated in Florida and Texas, have been able to defy national trends, primarily thanks to robust local economies fueled by consistent job and population growth.”
Baltimore, Milwaukee, Oakland, Memphis and Cleveland represent the top markets Ten-X suggested that investors might want to sell their retail property holdings. “These cities serve as a testament to weak economic and demographic indicators that exist in much of the Midwest and northeast, where shrinking or stagnating populations and weak demand continue to create a difficult climate for retail properties,” the report said.
Muoio noted that e-commerce–which he called the single largest secular threat to traditional retail–now comprises more than 13 percent of retail industry sales, resulting in “agonizingly slow” retail fundamental growth. “[The e-commerce] share has been rising for years and shows little signs of slowing, leading big-box retailers to either close or downsize many of their stores,” he said. “Hedge funds have increasingly been shorting real estate investment trusts and bonds tied to shopping malls, adding even more fuel to the already powerful headwinds facing the sector.”
Green Street Advisors, Irvine, Calif., said in a report that more than 800 department stores may need to close to reach a healthier sales-per-square foot level. “The era of a mall anchored by four department stores is coming to an end,” the report said. “One or two such stores per mall is the most likely future.”
Ten-X noted that effective retail rents rose 1.9 percent above year-ago figures. But overall deal volume fell to $18.6 billion–down 22.4 percent from the same period in 2015.
