Shopping Center Business

MAY 2016

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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Page 164 of 358

INDUSTRY OUTLOOK 160 • SHOPPING CENTER BUSINESS • May 2016 T he retail property market this year will continue to mirror the U.S. economy's irregular growth pat- tern of the last six years, which has been characterized by moderate economic expansion offset by headwinds such as softening international economies and turbulence on Wall Street. This paradigm has led a 66-month rally of continuous positive employment growth through March and added 14 million jobs to the labor force since the end of the Great Re- cession. Employers in primary, secondary and tertiary markets will maintain a steady pace of broad-based hiring this year, cre- ating approximately 2.5 million positions. This will support upward pressure on wage growth, which, along with low gas prices, will boost discretionary income levels and facilitate increased retail con- sumption. That said, wage growth could prove to be a double-edged sword if wag- es rise too quickly, which could result in rising inflation. Developers will complete 46 million square feet of new retail space this year, representing a modest decline from last year and allowing demand to exceed ad- ditions once again. However, metros vary in their phases in the construction cycle with developers in markets with tight vacancy ramping up construction, while builders in other metros are easing back as growth pressures fade. In other markets, rents have not yet caught up with the cost of new construction, thereby limiting de- liveries to build-to-suit projects. Overall, retail property demand remains ahead of post-recession trends, which will support stronger performance and greater compe- tition, particularly for existing shopping centers, as new developments remain muted. Lagging construction may also cause property owners and investors to look toward expanding shopping centers to relieve unfulfilled space demand, fur- ther enhancing property values. This sup- ply/demand imbalance will also impact vacancy rates nationwide. Last year, national vacancy fell to 6.2 percent as retailers moved into 66 million square feet of new space. In 2016, insa- tiable demand for retail space will cause vacancy to contract by 30 basis points to 5.9 percent — the lowest year-end level in 11 years. This will propel rent growth. The retail rent outlook this year appears bright as operators are projected to ad- vance rents by 2.8 percent nationally, the strongest rent appreciation since 2007. For this reason, retail properties will con- tinue to be popular real estate investment vehicles. In addition, significant competi- tion for well-placed assets has advanced valuations in many primary markets, which is leading some buyers to consid- er higher-yield metros in secondary and tertiary markets, multi-tenant shopping centers and/or value-add opportunities to generate elevated returns. Regardless, the retail property listing environment will be even more competi- tive this year than last. In 2015, strong property perfor- mance, equity flows and competitive debt markets converged to generate a modest in- crease in transaction velocity. While sales of single-tenant assets accounted for more than half of all trans- actions, the proportion of multi-tenant deals rose, indicating greater acceptance of operational and re-leasing risk among investors. The average cap rate across all transactions contracted about 20 basis points to roughly 6.5 percent as compe- tition for assets increased. This year, positive market sentiment and affordable financing will continue to bolster buyer demand and put additional downward pressure on cap rates. With first-year returns for retail properties na- tionally below the prior cycle's trough, the search for yield, especially among private investors, will intensify. Institutions will maintain a conservative position, target- ing returns in the 6 percent range offered by anchored shopping centers with long- term leases in place in major metros. Heightened investor confidence, along with limited construction, will support strategies to raise rents to augment NOIs, and will sustain a liquid investment mar- ket. Retail assets in secondary and tertiary markets will continue to be attractive in- vestment vehicles as investors pursue yield and debt providers compete for market share. The strong performance of retail prop- erties in 2015 helped to maintain a steady flow of equity into the sector and opened up new opportunities for debt providers to participate. CMBS accounted for about 29 percent of debt-issuance volume last year to claim a larger market share than all Positive Feeling For Retail Sector A look at the economic trends and their potential impacts on retail capital markets. Bill Rose Rose Bufalo N

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