Ten-X: Retail Sector ‘Struggling’ to Gain Momentum

The retail sector continues to struggle as consumers move toward online shopping, but investors can find solid retail assets in some healthier markets, reported Ten-X, Irvine, Calif.

“As more consumers opt to do their shopping online, the retail market is battling major headwinds as it crawls toward a comeback after the downturn,” said Ten-X Chief Economist Peter Muoio. 

Muoio said strong economic conditions in some regions prop up the sector nationally on a statistical level, “but this lasting shift in behavior will remain a stubborn impediment to the retail industry in the years to come,” he said.

Ten-X’s long-term forecast named Austin, Texas; Miami; Fort Lauderdale, Fla.; West Palm Beach, Fla. and San Francisco as markets where investors should consider buying retail assets. “These markets, concentrated largely in the southeast and west, are being fueled by robust local economies, where a steady influx of new residents are able to find jobs and fuel overall growth,” the report said.

Conversely, Milwaukee; Detroit; St. Louis; Memphis, Tenn. and Philadelphia represent the top markets where Ten-X said market conditions might cause retail investors to consider selling their properties.

“These cities reflect several lagging economic and demographic indicators in the midwest and northeast, where stagnating wages and lackluster growth outside of the major urban cores have made for a weakened retail climate,” Ten-X’s Retail Market Outlook report said.

Ten-X noted that 13 percent of retail sales now come through e-commerce–a share it expects will climb. “This has impeded demand for retail space, but the very low level of new retail construction means that absorption will outpace new supply over the next two years,” the report said. “The result will be continued slow recovery in vacancies, though research indicates demand may begin to dry up by 2019, pushing vacancies back above 10 percent and close to recession-era peaks.”

A “modest” uptick in demand during the second quarter pushed rents up 2.1 percent year-over-year and vacancies fell by 20 basis points to just under 10 percent, Ten-X reported. Overall deal volume in the sector fell to $17.6 billion, down 10.3 percent from the same period in 2015.