'More Gray Skies Ahead' for Retail Sector

Michael Tucker mtucker@mba.org

April 11, 2019

As the retail sector's shakeout continues, a number of retail real estate markets face more vacancies and falling rents, said Reis Senior Economist Barbara Byrne Denham.

"This pattern is expected to continue as more stores will close this year," Byrne Denham said. "[But] at the same time, we continue to see stores opening in every metro. A number of other big box vacancies have been converted to self-storage and/or sold to developers for redevelopment."

The overall retail vacancy rate held steady at 10.2 percent in the first quarter but the mall vacancy rate increased 0.3 percent as more Sears stores closed, Byrne Denham said. Rent growth was flat.

Vacancy increased in 28 of the 77 metros Reis studied, similar to previous quarters. The average asking and effective rent both grew 0.4 percent, in line with previous quarters.

Byrne Denham said the bigger news was the drop in retail sales in early 2019. "While this sends a chill through the retail real estate industry, the underlying data shows that the drop in sales was found in food and beverage stores, building material stores and general merchandise stores, all of which may have been impacted by weather conditions," she said. "All of these categories show healthy year-over-year sales growth while other categories show year-over-year declines such as electronics stores, miscellaneous stores and furniture stores."

Reis reported restaurants showed strong sales growth in February and over last year. When auto, gasoline and e-commerce sales netted out from total retail sales numbers not including restaurants, it found real-estate-using retail sales declined 1.1 percent in February. "In short, the retail real estate sector will likely see more gray skies ahead," Byrne Denham said.

Reis found a number of stores continued to open during the quarter. Of more than 16 million square feet of leases signed in the past five quarters, grocery stores were the leading new occupant followed by home/houseware stores, gyms/fitness, discount variety stores and discount clothing stores. Other media reports of store brands expanding include Five Below and Hobby Lobby.

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