Reports on retail leasing in the fourth quarter of 2013 paint a picture of conflicting trends in the sector. Analysts identified modest gains in occupancies and rents, but tempered them with troubling hints of potential long-term difficulties.
Analyses from both Reis Inc., a New York City-based research firm, and CoStar Group, a Washington, D.C.-based research firm, found declines in vacancies at retail centers. According to CoStar, vacancy on a national basis dropped to an average of 6.7 percent from the fourth quarter of 2012 to the fourth quarter of 2013. That’s the lowest rate since 2008.
Declines in vacancy from quarter to quarter have been slim. But the drop since 2011 amounts to “pretty good improvement,” says Ryan McCullough, a real estate economist with CoStar. “It’s enough that now we see rent growth. The market went from totally tenant-dominated to more balanced, and there’s better productivity in retail storefronts than in the past.”
Reis’s survey also found that vacancy declined 10 basis points from the third to the fourth quarter of 2013, to 10.4 percent. New construction increased and net absorption reached its highest point since 2007.
Those are "modestly hopeful signs," wrote Ryan Severino, senior economist with Reis. Yet growth lags long-term trends as consumers recover from the federal shutdown, Severino noted.
Both reports observed growth in rents. Quoted rates rose from $14.99 per sq. ft. in the fourth quarter of 2012 to $15.21 per sq. ft. a year later, according to CoStar. Reis found rents grew by 0.4 percent from the third to the fourth quarter of 2013, a market high since before the recession.
That presents a “welcome sign” to investors and developers, Severino said. But not all niches in the retail world have seen equal improvement, Reis found.
“Widening gaps in income and wealth over the last few years have served to exacerbate the rift between these ‘have’ and ‘have-not’ markets,” Severino said. “In the ‘have-not’ areas, demand remains depressed, new development activity is virtually, if not completely, non-existent, and in some of these metropolitan markets, such as Jacksonville, Tucson, and Syracuse, rents continue to fall even as the macro economy and labor market improve.”
Meanwhile, malls in affluent areas have enjoyed their customers' “voracious” appetites. Demand for space at these properties has kept pace.
“Mall owners, clearly cognizant of this trend, have sought to reposition their malls when possible to capitalize on this,” Severino says.
The Reis report cited Palisades Center Mall in West Nyack, N.Y., in particular. Estimated median household income in West Nyack in 2011 was close to double the state’s average income, according to city-data.com.
The analysts expect modest growth to continue in the retail sector in 2014. Severino cites expectations of a stronger economy, which would aid retail. But “have” and “have-not” properties will see varying growth, he notes. That trend will affect both malls and neighborhood and community shopping centers.
Reis identified other worrisome trends. Foot traffic declined at retail centers in November and December 2013, and the e-commerce sector continues to grow.
“Inferior malls will need to innovate creative ways to attract customers into their stores in the face of these growing threats,” Severino says.
Regardless, demand for retail space will increase in 2014, McCullough says. “We are simply seeing more retailers these days that have sufficient capitalization and levels of profitability to get back into the game and start taking stores again,” he said. “So we do expect to see a slight uptick.”
This article was republished with permission from National Real Estate Investor.