A steady pace of hiring and prospects of rising wages will drive expectations for lower retail property vacancy and rising rents this year.
National Retail Index (NRI)
Seattle-Tacoma maintains the first spot while San Francisco and Boston hold onto second and third place in this year’s Index. In all three metros, robust job growth driven by technology companies provides higher-paying jobs, attracting additional residents and generating increased retail demand. Meanwhile, restrained deliveries funnel new retailers into existing space, keeping vacancy tight.
The largest jump in the Index was posted by Dallas/Fort Worth (#12). The metro vaults seven places as a significant drop in deliveries amid rising demand tightens vacancy and drives rents higher. Sizable upward leaps were also posted by Denver (#11) and Atlanta (#22), each climbing six rungs as strong employment and population growth bolster retail sales this year.
Midwest metros with slower job and population growth are prominent in the lower portion of the Index. Milwaukee (#42), Cleveland (#44), Kansas City (#45) and St. Louis (#46) hold their positions from 2017 at the bottom of the NRI, interrupted by New Haven-Fairfield County (#43).
A steady pace of hiring and prospects of rising wages will drive expectations for lower retail property vacancy and rising rents this year. The economy has had the longest continuous period of job creation on record, adding jobs every month for more than seven consecutive years and keeping unemployment near 4 percent. An increase in consumption and business output as well as more robust residential construction will support GDP growth in the 2.5 percent range in 2018.
The steady economic tailwind over the course of the recovery has pushed consumer confidence to its highest point since 2000 while small-business sentiment attained a 31-year record level, reinforcing indications that consumption and hiring will be strong this year.
The new tax laws could play a significant role in shaping both the economy and retail demand in 2018. A reduction in the corporate tax rate will be a windfall for corporations, encouraging several retailers to increase investment in wages, hiring and infrastructure.
National Retail Overview
Rising consumer confidence levels and the potential for higher wages will carry retail momentum through 2018. Historically low completions and strong retail sales have buoyed space demand amid increased concerns about e-commerce and its impact on store closures. The emergence of online distribution combines with tighter construction lending and investor caution to restrain development.
Customers are changing the way they shop and turning to more experience-oriented establishments. Retailers are evolving with many enhancing online offerings and expanding through smaller-format stores.
National and regional banks have stepped in as key lenders for retail properties as CMBS lending eased amid heightened risk aversion in the sector that has persisted since 2016. In general, credit standards have held steady and the trend should continue into 2018 as lenders search for deals.
Investors have largely adapted to the modestly higher interest rate environment as the Federal Reserve continues to normalize its policies and balance sheet. The central bank has hinted at three to four increases of the fed funds rate during 2018 as it hedges against inflation risk amid accelerated economic growth.
Leverage on acquisition loans reflects disciplined lender underwriting, with LTVs typically ranging from 55 percent to 65 percent for most retail properties. The combination of higher rates and conservative lender underwriting encouraged some investor caution that slowed deal flow in late 2016, a trend that will likely extend into 2017. Lenders will continue to scrutinize properties’ exposure to underperforming chains and vulnerability to e-commerce this year.
Banks stepped in to capture greater market share last year as CMBS issuance eased in response to new risk-retention standards under the Dodd-Frank law. The prospects of major changes to Dodd-Frank could materially change CMBS standards this year, but revisions will likely emerge slowly.
Retail Investment Outlook
In the era of e-commerce, investors are increasingly modifying their strategies and widening their search criteria for opportunities with upside potential. Opportunistic investors in search of upside are positioning these spaces for smaller-format retailers and non-traditional users.
Several big-box retailers that traditionally anchor shopping centers are creating smaller-format versions. As a result, some investors are increasingly scrutinizing leases, considering whether these retailers will reduce their spaces in the near term.