Reis: Retail Sector Defies Negative Reports

Retail sector statistics defied otherwise negative reports of store closures–posting positive net absorption and holding vacancy steady in the second quarter–reported Reis, New York.

Reis Senior Economist Barbara Byrne Denham noted asking rents increased 0.4 percent during the quarter. “That’s low by any standard but still positive and contrary to the sentiment expressed in the media,” she said.

Asking rents increased $0.09 per square foot to $20.74 per square foot, Byrne Denham said. She noted effective rents increased 0.5 percent because concessions are less significant in retail real estate than in the apartment market. Retail sector asking and effective rents have increased 1.8 percent and 1.9 percent, respectively, since third-quarter 2016.

New construction equaled 1.6 million square feet during the quarter–the lowest completion level since 2014, Byrne Denham noted. Net absorption registered 578,000 square feet. “The underlying data shows that absorption was positive in July and August but negative in September as a number of stores in the Reis survey pool closed in the month,” Byrne Denham said.

The mall vacancy rate increased 0.2 percent–largely due to confirmed JC Penney and Sears stores closings–Byrne Denham said. The mall vacancy rate reached 8.3 percent during the quarter. Mall rents increased only 0.2 percent as most owners kept rents flat.

Kroll Bond Rating Agency Senior Director Larry Kay noted for many years mall department stores watched off-price apparel retailers such as Ross Stores and TJ Maxx lure value-oriented shoppers away by selling brand name goods at steep discounts. “It seemed to take a while for many of the major department stores to warm up to the off-price concept, perhaps due to concerns of cannibalization or brand dilution,” he said.

But Kay noted that has changed as the sector continues to struggle. “In fact, off-price formats, such as Nordstrom Rack and Saks Off 5th, now have a larger presence by store count than their respective chains’ full-line offerings,” he said. “How this all plays out is still too early to tell, but it seems to be clear that the off-price business model is being re-assessed.”

Byrne Denham called the quarter the second in a row with a “two-steps-forward-one-step-back” retail occupancy growth pattern. “This trend will likely continue in some fashion as more stores announced bankruptcy or closures including Toys R Us, The Gap, Teavana, True Religion Jeans and a few more.”