The 10 Best Markets For Retail Investment

April 3, 2017 in Latest News

consumer spendingOne fact that usually gets lost in the recent flow of news about store closures is that none of it is unusual. Retail concepts come and go all the time. Economic cycles and changes in consumer tastes all but guarantee that a retail concept that reigns supreme at one point in its lifecycle could very well file for bankruptcy or liquidate several decades later.

Still, the retail real estate sector accounted for $76 billion in investments at the end of 2016, according to Anjee Solanki, the U.S. national director of retail services at real estate services firm Colliers International. Major gateway cities like Atlanta, Los Angeles and New York often attract investor interest first, but experts point out that secondary markets offer just as many prospects for investors looking to put their money to work.

For investors, the economic outlook for 2017 looks mixed: varying estimates have the GDP growing between 2.1 percent and 2.5 percent in 2017, and wages are also expected to increase. The labor market is expected to tighten, as the economy is expected to create 2 million new positions in 2017, down slightly from the 2.2 million new jobs filled in 2016, according to the “2017 U.S. Retail Investment Forecast,” from Marcus & Millichap, a commercial real estate brokerage firm based in Calabasas, Calif.

Marcus & Millichap estimates that store openings among value- and service-oriented retailers could result in about 81 million sq. ft. of net absorption. Developers are expected to complete about 49 million sq. ft. of retail projects this year. That is a significant amount of development, but much lower than the estimated 225 million sq. ft. of new construction that the industry used to complete each year through 2007, says Bill Rose, a first vice president and national director of Marcus & Millichap’s retail group. Restrained new construction means the industry could see its vacancy rate drop to 5.1 percent.

Where does that leave retail real estate investors in 2017? Where should they look for acquisitions to get the best return on their investments?

10. Nashville, Tenn.

With thriving healthcare and technology sectors, the capital of Tennessee is attracting infrastructure projects, new construction and young people. Vacancies for 2017 are expected to average around 4.0 percent—among the lowest in the country, according to Marcus & Millichap. Rents are beginning to increase to rates that are comparable with those quoted in gateway cities.

9. Phoenix

This city of 1.5 million weathered the Great Recession and employment is now up 2.0 percent. The insurance and technology sectors represent the areas of greatest expansion, and they are attracting well-paid educated professionals. A clear seller’s market, retail fundamentals here strengthened in 2016, as the median asset price spiked 20 percent and cap rates slipped to 6.5 percent, according to Colliers.

8. Salt Lake City

This city offers prospective residents biking, fishing, hiking and skiing options. Marcus & Millichap’s Rose says investors are attracted to the market because it offers an appealing outdoor lifestyle experience.

7. San Diego

With perpetually sunny skies, strong land use controls and plenty of tourist attractions, it is no wonder that San Diego is considered part of the string of cities known as the “smile” of the United States. Investors can expect to pay a low going-in cap rate when buying in any one these markets, but with population and job growth in place, they also get good prospects for future rent growth.

6. Atlanta

This city lost one of the most invigorating comeback Super Bowls in recent memory, but it is still winning in the key areas of rising employment (up 2.5 percent) and asking retail rents (up 2.5 percent). New construction is expected to reach around 3.2 million sq. ft. this year.

5. Houston

Houston is among the cities with the highest number of expected completions, at about 3.6 million sq. ft. Gains in payrolls and employment endowed households with the kind of disposable income that supported retail sales growth.

4. Dallas

This gateway city is part of what the market calls the Triangle of Texas, along with Austin and Houston, and is a reliable locus of growth and strong investment. Employment prospects in the area are promising, with net migration is set to reach about 88,000 people. As for retail, asking rents are expected to rise to $15.47 per sq. ft. this year.

3. Denver

Colorado’s premiere city might seem isolated, but it offers an appealing outdoor lifestyle for young adults looking for a place to settle. Employment growth is a buoyant 2.8 percent. The retail vacancy rate is trending down and rents are also up 3.1 percent, according to Marcus & Millichap.

2. Los Angeles

Retail deliveries in 2017 are on course to double 2016 levels, but that is not a red flag for this market, according to Marcus & Millichap. Employment is expected to increase by 1.1 percent, and retail rents are expected to rise by about 2.0 percent. Retail properties are maintaining their appeal across various price points and locations around the city, keeping first-year returns within a range of mid- to high-4.0 percent, Marcus & Millichap reports.

1. New York City

Don’t let the recent headlines about landlords making rent concessions fool you. New York City is still a dominant gateway city, with strong hiring trends in healthcare, education and hospitality sectors, according to Marcus & Millichap. At the time of the report, about 60,000 new jobs were expected to hit the Big Apple market, and retail rents were expected to increase by 5.4 percent.

 

Source:  NREI

The Top 10 Retail Markets In The U.S.

September 15, 2014 in Latest News

One of the biggest trends in commercial real estate over the past year has been investors’ increasing interest in secondary and tertiary markets, as properties in gateway cities such as New York and San Francisco have assumed astronomical price tags.

It turns out, however, that at least when it comes to retail real estate, those price tags make perfect sense—the gateway cities are so expensive because they continue to boast the lowest vacancy levels and highest rents in the country, along with the most active investment sales marketplaces.

And in many of these cities, the amount of new retail construction coming on-line in the near future is scant, meaning that existing shopping centers and malls will face limited competition. Turns out in retail real estate, you get what you pay for.

National Real Estate Investor has comprised a list of the cities that made the Top 10 Retail Markets In The U.S. for 2014, basing the rankings on research from brokerage firms Cushman & Wakefield and Marcus & Millichap Investment Services and research firm Real Capital Analytics:

10-Denver10. DENVER

Denver may not immediately conjure up visions of a major retail destination, but the city offers some attractive property fundamentals, with a vacancy rate of 5.9 percent and a modest amount of retail under construction, at 630,878 sq. ft. The volume of retail assets changing hands in the city rose by a healthy 110 percent between mid-year 2013 and mid-year 2014, to $387 million.

09-houston9.  HOUSTON

Texas cities are where a lot of commercial real estate growth has been happening lately, driven by the state’s outperforming jobs market, and Houston is no exception. The city’s retail vacancy currently stands at 5.8 percent and it saw $669 million in sales in the first half of 2014. But there is also 1.29 million sq. ft. of new retail space under construction, so Houston’s retail supply is about to get a significant boost.

08-oakland8.  OAKLAND, CA

At first glance, Oakland may look like an outlier, but this Northern California port city has vacancy of only 4.3 percent, average rents of $21.82 per sq. ft. (higher than some major metropolitan hubs), and only 139,518 sq. ft. of new retail space under construction.

 

07-LA7.  LOS ANGELES

Nearby, Los Angeles also continues to prosper as one of the major retail draws in the country. Rents in the city average $24.27 per sq. ft., while vacancy has stayed at a conservative 5.1 percent. In addition, Los Angeles recorded the second highest volume of investment sales of retail properties in the first half of the year, at $1.8 billion. One of the few draws is that there are 1.3 million sq. ft. of new construction coming on-line.

06-boston6.  BOSTON

Boston has been another bright spot on retail investors’ radars since the downturn ended. The city’s vacancy rate is at 4.2 percent, it recorded $858 million in sales in the first half of 2014 and its year-over-year sales volume jumped an impressive 134 percent. Like Los Angeles, however, Boston has a fair amount of new supply coming up, with 2.8 million sq. ft. of space under construction.

05-san-diego5.  SAN DIEGO

San Diego combines low vacancy, at 4.3 percent and strong rents, at $22.37 per sq. ft., with a moderate new construction pipeline, at 576,528 sq. ft. The city also ranked sixth on Marcus & Millichap’s National Retail Index this year.

 

04-miami4.  MIAMI

Major tourist hub Miami has one of the lowest vacancy rates in the country, at 3.7 percent, with rents averaging $28.94 per sq. ft. It recorded $466 million in retail investment sales in the first half of 2014. But the city will also see an influx of new space coming on the market—1.2 million sq. ft., to be exact.

 

03-honolulu-alomoana-mall13.  HONOLULU

Honolulu has not gotten as much spotlight as some of the other cities on this list, but it’s definitely a contender. The city has the second lowest vacancy rate in the country, at 2.6 percent, and the third highest rents, at $34.57 per sq. ft. The retail investment sales market in Hawaii in general exploded over the past 12 months, with sales volume increasing 760 percent from mid-year 2013 to $732 million. Yet the amount of new retail space under construction in Honolulu remains relatively modest, at 323,203 sq. ft.

02-sf2.  SAN FRANCISCO

San Francisco has made so many headlines for its insane real estate boom recently it may overtake New York as the city of disgruntled renters, both residential and commercial. Things are no different in the retail sector. The vacancy rate is the lowest in the country, at 2.4 percent; the rents are the third highest, at $32.57 per sq. ft. Investment sales totaled $496 million in the first half of 2014. And the amount of new space under construction is miniscule, at 95,930 sq. ft.

01-NYC-Fifth-Avenue1.  MANHATTAN

Would you like to know why retail (and everything else) in Manhattan is so damn expensive? Here are the reasons: the vacancy rate here is at 3.0 percent, while the rents are the highest in the country by quite a wide margin, at $93.29 per sq. ft. Investment sales in the first half of the year totaled $3.4 billion, almost double that of runner-up Los Angeles, and represent an increase of 326 percent over the same period in 2013. The amount of new retail space under construction is under a million—776,066 sq. ft. and, of course, it ranked first on Marcus & Millichap’s National Retail Index.

 

Source:  NREI

Retail Real Estate Outlook Strong For Second Half Of 2014

July 21, 2014 in Latest News

strengthRetail real estate investment hit a new high in this current cycle, as declining vacancies and other strong fundamentals plus a surging economy portend several more robust years, according to a Marcus & Millichap online panel discussing the midyear 2014 outlook for the U.S. economy. “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 7.1 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 leading downsizers are RadioShack (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 that 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.”

 

Source:  SCT