U.S. retail fundamentals will improve in second half of 2013: Report
A favorable economic and demographic outlook, improving property fundamentals and low-yielding alternative investments will all drive demand for U.S. retail properties in the second half, according to Marcus & Millichap. First-quarter store closure announcements dropped by nearly 70 percent versus the previous year’s comparable quarter, according to the firm’s midyear report. Retailers vacated some 11.9 million square feet during the quarter, down from 25.4 million square feet a year ago. At the same time, retailers also announced twice the number of store openings relative to closings, says John Chang, Marcus & Millichap’s first vice president of research services, who oversaw the report. Nearly two-thirds of the new openings will be discount dollar stores, Chang says.
Marcus & Millichap expects net absorption of retail space to total some 79.7 million square feet this year, outstripping 55 million square feet of new supply and driving down the national vacancy rate by 40 basis points to 7.7 percent. The firm also anticipates that U.S. asking rents will grow by an average of 1.8 percent to $16.06 per square foot.
Expanding retailers and a tight construction pipeline are helping to attract investors to the U.S. retail sector, Chang says. Marcus & Millichap reports that first-quarter sales of U.S. retail properties totaled some $21.1 billion, up 32 percent from the year-ago volume, which was buoyed by two large mall-portfolio transactions. Meanwhile, sales rose 53 percent on a year-over-year basis. Strip centers accounted for nearly half of all transactions, followed by single-tenant properties. Single-tenant property deals soared 211 percent, and sales of strip centers rose 17 percent. Investors paid $125 per square foot for strip centers, on average, nearly 17 percent less than a year before and $155 per square foot for single-tenant properties, or 15 percent less than a year ago. The average cap rate for shopping centers increased by 30 basis points to 7.9 percent, but the rate for single-tenant properties fell by 21 basis points to 7 percent.
A revival in the commercial-mortgage-backed-securities market is helping drive some of this activity. CMBS financing is helping funnel more money to tertiary markets that are off institutional investors’ radar screens and creating a more competitive financing arena for retail properties, Marcus & Millichap says. CMBS loan originations totaled upwards of $37 billion in the first five months of this year, versus $48 billion for full-year 2012.