Reis: Retail Remains in Neutral
Retail fundamentals are improving only slightly, reported Reis, New York.
The national vacancy rate for neighborhood and community shopping centers remained unchanged at 10.1 percent in the third quarter, said Reis Senior Economist Ryan Severino.
“This marked the second consecutive quarter that vacancy was stagnant,” Severino said, noting that the national retail vacancy rate declined by just 20 basis points over the last 12 months. “Overall, the trend in vacancy is downward, if slow, so progress in the subsector is underwhelming.”
New construction for neighborhood and community center space remains virtually nonexistent with just 1.656 million square feet of space completed during the third quarter, Severino said. “The high vacancy rate is certainly keeping development at bay,” he noted.
The shift toward “experiential” shopping continues to spur the development of other retail subtypes at the expense of neighborhood and community centers, Severino said. “For example, town centers have become quite popular over the last couple of years as consumers have become enamored with the idea of shopping at a center that also includes outdoor promenades, fountains, green space, benches and outdoor dining.”
Severino said that grocery stores–once found only in neighborhood and community centers–can now be found in power centers and town centers. “These are structural changes that, all else being equal, will limit supply growth for neighborhood and community centers in the future,” he said.
Reis reported that asking and effective rents both grew by 0.5 percent in the third quarter, on par with rent growth over the last few quarters. Over the last 12 months asking and effective rents grew by 2.0 percent and 2.2 percent respectively, a slight improvement over last quarter and 2014 and the best performance for year-over-year rent growth since before the recession.
“Nevertheless, high vacancy and the lack of new supply are both conspiring to keep rent growth in check,” Severino said. “It will be a number of quarters before we see more meaningful acceleration in rent growth.”
The outlook for spending during the balance of the year remains bright with tight labor market conditions and ongoing benefit from relatively cheap oil, Severino said. But the direct benefit to many traditional retail properties will likely remain muted for the foreseeable future, he noted: “Although consumer spending continues to increase, it does so via far more channels and retail subtypes than it once did, which means the same level of spending increase does not translate into the same level of demand for space in the traditional retail subtypes. Slow and steady is an unexciting but completely reasonable outlook for their recovery.”
