When Charles Dickens wrote his famous opening line, “It was the best of times, it was the worst of times,” he couldn’t have realized how apt it would be for the retail real estate market more than 150 years later. According to Jones Lang LaSalle’s U.S. Summer Retail Outlook, varying population growth and purchasing power across U.S. markets will widen the performance gap of centers creating a different outlook for owners and occupiers of these assets.
“Competitive centers that are well-tenanted and ideally located are seeing vacancy rates near four percent, and we expect them to see further improvements,” says Greg Maloney, president and CEO of Jones Lang LaSalle (JLL) Retail. “However, underperforming centers that can’t sustain the needed sales volumes to remain competitive due to their surrounding demographic may continue to trend downward, and require eventual demolition, rebranding or a conversion.”
During the last year, consumer confidence took a deep dive, but rallied this summer as consumers benefited from higher stock and housing values, falling gasoline prices and lower debt levels, according to JLL’s retail report. The improvement is expected to be tempered by high unemployment and slow income growth.
“Consumer confidence remains volatile, as shoppers adjust to changes in their income and the rising cost of goods,” says Lew Kornberg, leader of JLL’s Americas retail tenant representation practice. “Nonetheless, we are confident about the modest growth and expansion of retailers, as performance heads in the right direction.”
The Supply Spigot
New retail supply is at the lowest level in a decade, with only 16.9 million square feet of development underway in the U.S. during the first half of 2013. The supply coming on line is mainly big-box, single-tenant stores anchored by discount retailers. Absorption has been kept in check due to constricted supply and fewer mass store closings. In the first half of 2013, an average of 14 million square feet was absorbed nationwide. Meanwhile, overall retail market vacancy remains well above the 10-year average of 6.8 percent.
Adjustments to consumers’ needs have pushed middle-of-the-road retailers out of the mix, as niche-specialty shops and regional mega-stores move in. Food, beverage, clothing and healthcare retailers will see improvements in markets where population growth exceeds the national average. In the next 12 months, nearly 60 percent of expected store openings fall into the food and beverage category, according to RBC Capital Markets.
Market Moves: U.S. Cities with the Deepest Vacancy Declines
· Atlanta: Year-over-year vacancy declined to 9.7 percent in the second quarter of 2013 compared with 10.1 percent in 2012. JLL’s retail report says lower vacancy will push up rents, but such growth is still several quarters away. In the near term, landlords are still offering tenant-favorable concession packages and lease structures. Construction starts will remain sparse and in affluent areas in the northern part of the metro area.
· Dallas: The retail vacancy rate fell 90 basis points year-over-year to 7.7 percent in the second quarter, while the rental rate inched up 0.4 percent during the same time period to $13.52 per square foot. JLL expects vacancy compression to continue through 2013. Rents have started to rise and will continue as demand gets stronger. However, JLL predicts another two to three years for rents to return to pre- recession levels.
· Seattle: The long-run outlook for demand is solid as above-average population expansion and employment growth in high-paying tech industries will raise retail sales in Seattle. Rents are expected to start expanding this year as vacancy continues its descent. During the second quarter of 2013, vacancy declined to 5.3 percent compared with 6 percent at the same time last year.
— Rachel Goff