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Retail Vacancy Holds Steady Through First Quarter Despite More Store Closures

Despite an elevated pace of store closures, like the 390 announced by Virginia-based Family Dollar earlier this year, limited new construction and healthy absorption have helped stabilize the national vacancy rate.

NEW YORK CITY — The national retail vacancy rate stood at 10.2 percent at the end of the first quarter of 2019, unchanged from the previous period and up 20 basis from the first quarter of 2018, according to New York-based commercial real estate analytics firm Reis. The report was based on analysis of the company’s internal information on retail properties in 77 American metros.

The average asking rent for U.S. retail space closed the quarter at $21.30 per square foot, up 1.6 percent from a year ago, per the report. Net absorption for the opening quarter was 949,000 square feet, which represents a small decline from that period in 2018.

However, the report notes that a slower pace of new construction has helped offset occupancy dips brought on by brick-and-mortar store closures. Less than a million square feet of new product was delivered during the first quarter of 2019. In the first quarter of 2018, the volume of new deliveries was more than double that figure, and in the fourth quarter of 2018, supply additions nearly tripled that number.

Reis projects that new construction will ramp up as the year unfolds, with the total U.S. retail inventory projected to grow by 8 million square feet this year.

Winners and Losers

Thus far in 2019, nearly 5,000 store closings have either occurred or been announced, according to research from Coresight Research. Soft goods categories for which there is growing online competition have again been the primary casualties of war, led by the likes of discount retailer Family Dollar (390 stores), apparel and accessory chain Charlotte Russe (94 stores) and Nashville-based bookseller LifeWay (170 stores).

A few large cities experienced increases in their retail vacancy rates to begin the year, with Knoxville, Pittsburgh, Austin and Milwaukee all among the leaders in increased vacancy. Omaha, Greensboro/Winston-Salem and Orlando were among the metros that experienced the biggest declines in retail vacancy to begin 2019.

The Reis report notes that over the last five quarters, the U.S. retail market has seen approximately 16 million square feet of new leases executed. Among those deals, grocers and entertainment concepts continue to emerge as clear winners in terms of user profiles.

Among entertainment users, the market has seen a particularly pronounced spike in demand for trampoline-based concepts, such as Urban Air Adventure Park and Sky Zone, according to the report. Fitness concepts, home furnishing stores and discount clothing retailers have also been among the other top categories for leasing volume and velocity over the past 12 to 18 months.

Some national retailers that operate out of big boxes, such as Hobby Lobby, Five Below and Ross Dress for Less, are continuing to grow their footprints and open new stores. But other big box users that have traditionally anchored malls or regional power centers — Sears, J.C. Penney and Toys ‘R’ Us, for example — continue to find themselves on the losing side of the e-commerce war.

The Long View

In many large markets, retail fundamentals will likely worsen in the short run before improving in the long run, according to the report. Larger cities should expect to see some rising vacancies and falling rents as more retailers close or restructure the brick-and-mortar components of their businesses.

Simultaneously, these same markets are seeing new stores open their doors and gamble on concepts that offer a blend of authenticity and originality. All this activity supports the narrative that retail real estate is evolving rather than dying.

The Reis report also found that retail sales during the first quarter of 2019 declined significantly, further hindering landlords’ ability to push rents. Some of the sectors that saw the strongest leasing activity over the last 12 to 18 months — food and beverage, building materials and general merchandise — represent the same categories that saw noticeable drops in sales.

However, the data also suggests that dwindling sales during the year’s opening period were tied to extraneous factors, mainly weather and the government shutdown, and are not necessarily indicative of a broader economic slowdown. Those retail sectors all experienced year-over-year sales growth, while categories like electronics and furniture saw their annual sales figures decline.

— Taylor Williams

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