Shopping Center Business

MAY 2018

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

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RETAIL FORECAST 112 • SHOPPING CENTER BUSINESS • May 2018 R etail real estate investments are well positioned to outperform for the remainder of 2018 as the tight labor market pushes wages up and a reduced tax burden for many individuals and corporations promote greater con- sumption and retail spending. THE ECONOMY AND RETAIL The economy is operating at near full employment, currently experiencing the longest period of job creation on record. In addition, the total number of avail- able jobs remained in the low 6 million range, highlighting employers' unbridled demand for new talent. That said, job growth will moderate slightly this year, adding 1.8 million jobs, with the construc- tion, professional services and hospitality sectors leading hiring. As unemployment hovers just above 4 percent, upward pres- sure on wages continues to build. Strong potential of rising wages underlies an ex- pectation that retail real estate will contin- ue to perform positively. The new tax law also plays an import- ant role in real estate this year. In the immediate aftermath of the law's pas- sage, many companies made substantial commitments to investing in wages, hir- ing and infrastructure. The new tax rules should also reduce the uncertainty in a marketplace that gave investors pause and tempered transaction velocity in 2017. In addition, the law's favorable treatment of pass-through entities and the preserva- tion of like-kind exchanges for real estate assets should also encourage additional investment. The consensus that most individuals and corporations will have a lower tax burden also benefits retail per- formance through greater spending. These promising economic metrics should boost discretionary income, which in turn may bolster core retail sales, a key economic driv- er that excludes automobile and volatile gasoline sales. Investors in this segment will also benefit from a diminishing con- struction pipeline. DEMAND OUTPAC- ING DELIVERIES Historically low completions and rising retail sales have buoyed space demand despite media concerns about e-commerce and its impact on big-box store clo- sures. Retail devel- opment has trailed demand for much of the recovery, and this trend will continue through 2018 as rising de- velopment costs work to reduce an- nual completions by roughly 10 per- cent, upon delivery of 54 million square feet of retail space. More than 30 percent of all retail construction this year will be focused in seven major markets, those being Boston, Dallas-Fort Worth, Hous- ton, Miami, New York, Phoenix and San Francisco. Multi-tenant shopping centers make up the bulk of deliveries this year with much of the construction being range-bound. Single-tenant assets, which have account- ed for two-thirds of deliveries since 2009, make up a lesser share of the new supply with projects being built-to-suit for strong credit tenants. For both retail types, con- struction lending will remain conser- vative, allowing absorption to outpace completions, leading to declining retail vacancy. RETAIL REAL ESTATE NEAR FULL OCCUPANCY Healthy demand and climbing core retail sales drove nationwide vacancy down to 5.1 percent by the end of 2017, its lowest level in more than 18 years. 2018: The Look Ahead With the year nearly half over, new legislation and a strengthened investment climate bring positivity to the retail sector. Scott Holmes

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