Retail Sector Fending Off Worst Fears

Despite fears of an impending retail apocalypse, the sector has been able to ward off the worst of the predictions so far, reported Reis, New York.

Reis said the retail vacancy rate fell 10 basis points during the second quarter to 10.1 percent. Asking and effective rent both grew 0.4 percent in the quarter, in line with previous quarters. The vacancy rate for malls remained flat while rents grew 0.2 percent.

“This by no means indicates the sector is without ongoing challenges as a number of stores are still expected to close in the second half of the year and online shopping continues to offer stiff competition to brick-and-mortar stores,” said Reis Chief Economist Victor Calanog. “Older stores that are not keeping up with new business strategies or modernizing will likely continue to suffer and close in this tumultuous time.”

The retail sector has adapted to the modern world in several ways, Calanog noted. “Some stores have had success in adopting new business strategies in an effort revitalize their brands,” he said. “On the supply side, empty big box stores have been converting to self-storage or been sold to developers for redevelopment, former shopping centers have been demolished and there has been a general slowdown in building within the sector. With minimal construction in the pipeline, vacancy rates were able to stabilize a bit [during the second quarter], though the retail sector will likely see more fluctuation ahead.”

Calanog said the performance of malls and neighborhood and community centers will likely be affected by more store closures throughout the second half of the year. “Yet the stability of the trends this quarter shows how the retail sector has been able to withstand structural changes in the industry to some extent,” he said.

Marcus & Millichap, Calabasas, Calif., said the retail sector’s transformation is starting to balance e-commerce growth. Single-tenant brick-and-mortar staples such as restaurants and pharmacies each saw nearly four percent growth during the second quarter.

Though e-commerce growth still leads all retail categories, e-commerce growth has trended downward for the past year and a half. “May marked the first month this cycle that e-commerce sales failed to reach double-digit growth,” the Marcus & Millichap Retail Research Brief said. “Though online shopping remains a key component of retail spending, its prominence has begun to moderate as experiential brick-and-mortar concepts gain more traction with consumers.”