The retail sector of commercial real estate continues to recover strongly, but the economic improvement is not universal and lags behind other property types, according to Integra Realty Resources (IRR).
In its annual Viewpoint study, the commercial real estate valuation, consulting and advisory firm reports that all but one of the major U.S. markets it tracks are in either the recovery or expansion phase of the real estate lifecycle. One city — Greensboro, N.C. — is in the final phase of recession, and no markets are currently experiencing hypersupply.
Notably, Atlanta became the last huge market to leave the recession phase and officially enter recovery. Only New York is in the last stage of expansion, leaving the vast majority of tracked markets in late recovery or early expansion stages.
Although the news is positive, retail’s recovery is slower than the other real estate sectors. Multifamily, for example, has all but three markets currently in the expansion phase.
Patrick Kerr, a senior managing director for IRR in Washington, D.C., says retail is one of the slower sectors to rebound because it’s location-based more than other sectors. This leads to fewer variables to lead to recovery.
“The variables are pretty constant in the marketplace,” says Kerr. “Retailers follow rooftops, job growth and disposable income. Investors look at the same variables, but also interest rates, tenant credit and barriers to entry. But retail is truly a location-driven property type as much as any property type.”
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Low gas prices have driven the recovery of this segment, as more comfortable consumers lead to more active investors.
“It certainly helps consumer confidence, which in turn creates greater investor interest,” says Kerr. “More investors playing in the market, creates greater potential for price increases.”
Markets Recovering for Different Reasons
Explaining why some markets are remaining in the recovery phase rather than moving into full expansion, Kerr says that many factors have led to slower recovery in the retail sector. Mid-size markets like Cleveland, Ohio, and Birmingham, Ala., for example, are showing slow recovery for completely different reasons than a bigger retail market like Las Vegas.
“The two former markets can best be described as lagging markets. They didn’t have the wide swing of excessive development and a long absorption market afterwards,” says Kerr. “Las Vegas is a market that experienced hypersupply with a slow recovery.”
The recovery has also caused some anomalies, most noticeably in transaction volume. The Viewpoint report shows massive increases in 2014 versus five-year historical averages in cities like Salt Lake City (621 percent increase) and Washington, D.C. (539 percent increase). Jacksonville, Fla., saw a 375 percent increase, as well as a 434 percent increase in transaction prices.
Kerr says not to worry too much about these spikes, as they result more from several years of slow transactions than a true flurry of activity.
“There has been little transaction activity in [Salt Lake City and Washington, D.C.] in the past several years,” says Kerr. “When there has been activity, it has been the best-in-class properties.
“The Class B and strip property owners have held out for better prices. This past year we have seen some improvement in pricing for the other classes, but mostly sellers accepting a potential peaking in the market for their properties.”
Retail Could Enter Hypersupply
With recovery, there’s always the concern that overbuilding could rush markets directly through expansion and into the hypersupply phase. Kerr says this is a problem to watch out for, particularly in certain areas such as “the heavily energy-influenced markets like Houston; Midland, Texas; and parts of North Dakota and Pennsylvania.”
“With consumer confidence holding, based on stable to slightly increasing interest rates and fuel costs and available financing, we will see more retail in many markets,” says Kerr.
When asked about the best areas for growth in the immediate future, Kerr notes some key developments to keep an eye on.
“We are seeing infill locations, rehab of existing property in the best locations, and shadow-anchored strip centers offering some of the best value-added opportunities,” he says. “Also, urban retail appears underserved in cities experiencing remigration.”
IRR Viewpoint 2015 is the industry’s annual compendium of real estate valuation, investment and leasing trends and forecasts. The report provides data, analysis, and forecasts on local and national market conditions for seven industry sectors throughout the United States, including capital markets, office, multifamily, retail, industrial, lodging and self storage.
To learn more about the Integra Realty Resources and the Viewpoint 2015 report, click here.
— Jeff Shaw