April 3, 2017 in Latest News
One 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.
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.
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.
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.
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.
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.