Retail Sector Growth Slows To ‘Low-Water Mark’

The retail sector’s long-term forecast has reached a “low-water mark” for the current cycle, said Ten-X, Irvine, Calif.

Ten-X laid blame for the “non-recovery” on technology companies and non-traditional retailers that continue to disrupt traditional brick-and-mortar retail–most spectacularly with’s $13.7 billion purchase of Whole Foods. “The impact of headwinds created by consumers’ shift to e-commerce, and the uncertainty it has created, cannot be overstated,” the firm’s U.S. Retail Market Outlook report said, noting the sector will likely continue to wrestle with these challenges for years to come.

“The rise of online shopping puts extreme pressure on the recovery of the retail sector, demonstrated most clearly by bankruptcies of storied retail chains, sweeping store closures and shrinking footprints,” Ten-X Chief Economist Peter Muoio said. “For now, the sector is being sustained by strong economies and high incomes in some regions around the country but it faces the risk of stagnation should an economic downturn strike.”

E-commerce–the retail sector’s most formidable challenge and risk factor–continues to grab more consumer spending, the report said; it now comprises 14.4 percent of total non-auto retail sales, up from less than 10 percent five years ago. “With more people shopping from the comfort of home, in-store inventory needs have declined,” Muoio said. “Consumers are still shopping, but more sales are being fulfilled from warehouses while retail’s per-person footprint continues to shrink. As a result, the warehouse and distribution sector has been the beneficiary of e-commerce’s hegemonic rise.”

Effective retail rents rose 1.8 percent in the second quarter compared to a year ago, a growth rate unchanged from the first quarter, Ten-X reported. Retail vacancies ticked up 10 basis points to 10 percent; they have now risen 20 basis points over the last year. Overall sector deal volume sagged to a 4-year low $14.6 billion.

The long-term forecast suggested investors should consider buying retail assets in Austin, Texas, Denver, Dallas, Salt Lake City, Utah and San Jose, Calif. “These markets–clustered largely in the southwest–have been able to defy the forces working against retail thanks to expanding populations, job and wage growth and increasing shopper counts,” the report said.

Kansas City, Mo., Memphis, Tenn., Cleveland, northern New Jersey and Pittsburgh, Pa. are the top markets in which investors might want to consider selling retail properties, Ten-X said. “These cities face adverse retailing conditions due to either economic struggles or the double whammy of slow population growth and high rents.”