Shopping Center Business

MAY 2017

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

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INDUSTRY OVERVIEW 190 • SHOPPING CENTER BUSINESS • May 2017 T he retail real estate market will experience its eighth consecutive year of performance gains this year as upward economic momentum strengthens consumption and bolsters the retail sector. With the economy oper- ating near full employment, the rate of job creation may decelerate, however 2 mil- lion new positions are projected in 2017. This will elevate wage growth pressures, which picked up steam last year, and will promote higher retail spending. As a re- sult, retail sales are expected to increase 4 percent this year, in line with the long- term average. Additional factors pointing to a favorable year in retail include a surg- ing stock market and climbing consumer confidence. The combination of these factors reinforces the foundation for greater consumer spending and eclipses potential downside risks to the economy such as lingering uncertainty related to the Trump administration's economic agen- da and a rising interest rate environment. Near-term economic progress is also en- couraging as steady GDP growth widens the availability of consumer and business credit, fueling further spending and ex- pansion. Finally, the emerging millennial cohort will also provide a more meaning- ful lift to retail spending this year as that generation's spending power rises and begins circulating through the economy. This group will also significantly influence the future of the retail sector both in term of merchandising and distribution, which will impact demand for retail real estate in a variety of ways. Despite store closure announcements from several big box brands and the ex- pansion of online retailing, the retail sec- tor continues to flourish. Although these closures have generated headlines and concern, they are concentrated in region- al malls and have not, for the most part, affected open-air retail shopping centers. In addition, several value- and service-ori- ented retailers, such as Aldi, Lidl, Dollar General, Verizon and ULTA, lead a list of scheduled store openings this year that will help generate 81 million square feet of net absorption, and highlight the nature of the evolving retail climate. That said, the growing reliance on online distribu- tion in combination with tighter construc- tion lending and investor caution, have worked to restrain development. This year's projected completions of 49 million square feet mark a distinct decline from 2016. The transforming retail environ- ment and popularity of online shopping is also prompting changes at the property level, with many owners repositioning an- chor space to accommodate restaurants, fitness facilities and service providers as a strategy to enhance property perfor- mance. Owners are specifically keen on retailers that are dif- ficult to disinterme- diate through online options. It is also worth not- ing that throughout the current business cycle, builders have overwhelmingly de- livered projects that have skewed toward s i n g l e - t e n a n t concepts, par- ticularly in the q u i c k - s e r v i c e r e s t a u r a n t , pharmacy and dollar store s e g m e n t s . Broadly, sin- g l e - t e n a n t buildings have a c c o u n t e d for more than 80 percent of retail con- struction since 2009. Despite the uptick in net-lease de- liveries, demand for space remains well ahead of supply growth. This subdued development and high demand for both multi- and single-tenant retail space will continue to produce a corresponding impact on vacancy levels and rents throughout 2017. As noted, completions remain con- strained, diverting expanding tenants into existing spaces, which will support the vacancy rate declining for the seventh consecutive year. The significant restraint in development — uncommon at this stage of the growth cycle — will bolster retail property performance, pushing the na- tional vacancy rate to a 16-year low of 5.1 percent. As a result, rent growth on a macro scale will experience a fifth year of gains, rising by 2.4 percent and bringing the average asking rent back within range of the peak set in 2008. Diminishing vacancy and rental improvement will also contin- ue to keep investors engaged in retail real estate throughout 2017. Overall pricing and cap rates have sur- passed their pre-recession peaks, with much of this recovery concentrated in primary markets. Yet, many secondary Flourishing Sector Despite store closures, the retail sector is poised to have another year of growth in 2017. Bill Rose Bill Rose First Vice President Marcus & Millichap Retail sales are expected to increase 4 percent this year, in line with the long-term average. Additional factors pointing to a favorable year in retail include a surging stock market and climbing consumer confidence.

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