Retail Sector Rays of Hope

The retail sector continues to struggle despite increasing consumer spending and a healthy labor market. But there is hope, said Ten-X Chief Economist Peter Muoio.

Coresight Research, New York, estimated more than 8,500 store closures have been announced so far in 2019, up significantly from 5,524 store closures last year.

Due to those store closures, brick and mortar store space absorption has fallen even as developers have scaled back new retail space construction. Retail vacancy rates have stagnated near the 10 percent mark, Ten-X Commercial said.

“The retail sector will remain relatively weak through 2020 as the sector contends with both cyclical and secular headwinds buffeting it,” Muoio predicted. “Thereafter, cyclical headwinds will dissipate somewhat, alleviating the pressures on retail demand somewhat.”

Muoio said retail transaction activity on Ten-X Commercial’s platform has started to increase, which he called a sign of “strategic investment” sentiment. Visits to the site’s retail listings have increased 35 percent since third-quarter 2018 to the highest level in four years. Similarly, the number of visitors to Ten-X Commercial’s retail property due diligence document vaults has increased 22 percent year-over-year.

“Despite a struggling retail market, overall sentiment for strategic retail investments remains strong, as demonstrated by the increase in PDPs [retail listing page views], vault visits and rising listings on the platform,” Muoio said.

The sector could also see also a short-term boost in November and December from holiday spending, retail analysts say. Deloitte, New York, estimated holiday retail sales will increase between 4.5 percent and five percent this year. The research firm’s annual holiday forecast projects e-commerce holiday sales will grow 14 to 18 percent compared to last year.

And the National Retail Federation, Washington, D.C., said it expects November and December retail sales to increase between 3.8 percent and 4.2 percent compared to the same time last year. Total holiday spending could exceed $730 billion this year, NRF said. Holiday sales have increased 3.7 percent on average over the past five years.

The Ten-X Commercial Retail Valuation Index predicted the retail market will continue to weaken through 2020. But it said cap rates could start declining in 2021 as fundamentals improve slightly, leading valuations to increase more than 14 percent in 2021 and 2022.