U.S. retail real estate outlook is strong for second half of 2014: experts

Publish Date: July 17, 2014

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Retail real estate investment hit a new high in this current cycle, and  declining vacancies and other strong fundamentals portend several more robust years, according to a Marcus & Millichap online panel discussing the midyear 2014 outlook for the U.S. economy and retail markets. “The cost of capital is low, construction levels are low, plus we’re now in a growth cycle in new-store creation,” said Bill Rose, a vice president and the national director of Marcus & Millichap’s National Retail and Net-Leased Properties groups. “It’s a good investment environment.”

A record-high stock market has created an upswing in consumer confidence and prompted a comeback by small, independent tenants, said John Chang, first vice president of research services at Marcus & Millichap. “This is generating tailwinds for the economy,” Chang said. Rose and panelist Rodney Chu, who is executive director of real estate acquisitions at UBS Global Asset Management, estimated that the U.S. economy and the retail industry are about halfway into a 10-year growth cycle. Over the past five years, about 9 million jobs were added to the workforce, more than offsetting the 8.7 million lost in the recession, said Chang. About 800,000 jobs were added in the second quarter alone, he said. Texas continues to lead the nation, but slower U.S. job markets, such as Chicago, Las Vegas and Phoenix are starting to enjoy gains too. Phoenix, still 90,000 jobs short of its prerecession peak, added about 24,000 in 2013.

Amazon.com is projected to post a 20.3 percent year-over-year sales gain this year (about $67 billion), the top three retailers in online sales growth all have physical stores: Macy’s, with 31 percent, Walmart, at 30.3 percent and Apple, with 24 percent, according to Marcus & Millichap.

Retail construction remains minimal — although with national vacancies tightening to 6.5 percent, developers and once-cautious national retailers “will at least be looking at expansion now that the overhang has been absorbed,” Chang said. “We saw all that development where centers got ahead of rooftops, and now we’re starting to see those centers fill up.” San Francisco is leading the country, with a 2.1 percent vacancy rate, followed by New York City (with 3.8 percent) and Miami, San Diego and Boston (all at 4 percent). Even markets with stubbornly high vacancies are improving, Chang noted. Among those are Phoenix (with a 9.8 percent vacancy rate, down 1.3 percent year on year), Detroit (with 9.3 percent, down 0.9 percent), Atlanta (at 9 percent, down 1.1 percent) and Chicago (8.2 percent, down 1.2 percent). Chang said he is seeing more single-tenant investment deals in the $1 million to $10 million range. And cap rates continue to ease back from their peak in 2012, he said.

The top five expanding chains in the U.S. are Dollar General (650 stores), Five Guys Burgers and Fries (600), Family Dollar (500), Walmart (430) and KFC (350). The top downsizers are Radio Shack (with 1,100 stores to close), Coldwater Creek (with 365), Sears (300) Abercrombie & Fitch (180) and Sbarro (155). Despite a few blips, economic indicators continue to encourage investors, Rose said. “Store closings are down substantially, we have a very healthy economy, long-term average inflation is a [desirable] 2 percent and Treasury rates are below the long-term trend,” he said. “The Fed is going to keep a close watch on the inflation rate and will be walking a tightrope as the economy builds momentum,” he said.

An industry consensus indicates interest rates will remain at current levels for the next 18 to 24 months, according to Chu. Meanwhile, there is plenty of growth capital, panelists said. CMBS issuance could reach $100 billion this year, up from $85 billion last year, Chang said. About a fourth of the UBS retail portfolio is in the resurgent power retail category, said Chu. “Not so long ago some of our competitors were not so high on power retail,” he said.

This year is expected to end with GDP up a modest 1.7 percent, owing to a 2.9 percent first-quarter decline attributable to the “polar vortex.” The economy has since been ticking along, with GDP up about 3 percent. Instability in such places as Ukraine and the Middle East could throw a wrench in the works, Chang says. “But there’s always risk,” said Chang. “The U.S. has the largest economy in the world, and it’s building momentum.” 


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