Ten-X: U.S. Retail Sector Continues To Weaken As E-commerce Increases Market Share, Drags Down Fundamentals
Ten-X: U.S. Retail Sector Continues To Weaken As E-commerce Increases Market Share, Drags Down Fundamentals
Ten-X Commercial sector report shows top retail "buy" markets clustered in the Southwest: Austin, Denver, Houston, Dallas and Salt Lake City
IRVINE, and SILICON VALLEY, Calif., May 3, 2018 /PRNewswire/ -- Ten-X Commercial, the nation's leading online and only end-to-end transaction platform for commercial real estate, today released its latest U.S. Retail Market Outlook, including the top five 'Buy' and 'Sell' markets for retail real estate assets. The long-term forecast concludes that retail's long and slow recovery, already a laggard compared to other CRE segments, is definitively sputtering to a halt. Overall investment in retail properties fell to $15.3 billion in the fourth quarter of 2017, a 19 percent plunge from a year earlier.
"In terms of brick-and-mortar stores and the real estate that supports it, the phrase 'retail apocalypse' is no hyperbole," said Ten-X Chief Economist Peter Muoio. "Store footprints are continuing to shrink, and we are seeing droves of traditional retail assets being repurposed or simply demolished. Headlines of store closings and bankruptcies of household names like Toys "R" Us and Radio Shack are some of the most visible signs of the massive reordering taking place in the retail space. While there are some markets that have managed to stay afloat and even thrive, the national retail picture is decidedly bleak."
The report indicates that Austin, Denver, Dallas, Houston and Salt Lake City are markets where investors should consider buying retail assets. These areas, clustered in the Southwest, benefit from expanding populations, job and wage growth, and increasing shopper counts, which partially offsets the powerful forces working against traditional retail nationwide and globally.
Detroit, Kansas City, Chicago, Northern New Jersey and Memphis are the top markets in which investors might consider selling retail properties. These cities face adverse retailing conditions linked to poor local economic indicators, which may include lack of population growth, tepid job growth, or simply an overabundance of new supply.
E-commerce, which has steadily chipped away at the retail sector's fundamentals throughout this cycle, now comprises 14.2 percent of total non-auto retail sales, up from 5.5 percent just five years ago. It is likely to continue rising in the coming years as consumers expand the scope of their online purchases to new types of products. The warehouse and distribution sector has been the biggest beneficiary of this transformation, as sales are increasingly fulfilled from warehouses instead of retail stores.
"In today's market, there is limited upside for retail fundamentals and we expect further declines in both the number of actual stores and the size of their footprints," Muoio said. "With fewer shoppers coming in the door, brick-and-mortar locations simply do not need as much in-store inventory as they used to. We've seen many traditional retailers partner with e-commerce companies in recent months, underscoring the importance for even brick-and-mortar stalwarts to have significant e-retail components."
Ten-X Commercial's forecasts include the effects of a general, cyclical downturn scenario in 2019-2020 in order to analyze how each market would respond to cyclicality, or "stress test" conditions, especially given the long duration of the current economic expansion. The forecast model reintroduces economic growth in 2021.
Retail vacancies are currently at 10 percent and are projected to decrease another 10 bps by year end. During a 2019-2020 modelled recession, vacancies are projected to increase back up to the mid-10 percent range where they are likely to remain even when growth returns in 2021. This is an elevated vacancy rate compared to previous cycles. Effective retail rents edged up 1.9 percent in 2017 and should continue at that rate of growth through 2018. However, growth will likely reverse by the second year of the forecasted recession. Recovery in 2021 is projected to return rents to their current levels.
4Q 2017 - 2021 US RETAIL PROJECTIONS
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Top 5 Buy Markets 4Q 2017 2021 Change in Rents 4Q 2017 Vacancies 2021 Vacancies Change in
Rents ($ psf) Rents ($ psf) (%) (%) (%) Vacancies (bps)
--- ------------ ------------ --- --- --- --------------
Austin, TX 21.40 23.09 7.9% 5.5 5.5 0 bps
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Denver, CO 16.70 17.95 7.5% 9.2 9.1 -10 bps
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Houston, TX 16.11 17.23 7% 11.2 11.1 -10 bps
----------- ----- ----- --- ---- ---- -------
Dallas, TX 16.17 17.21 6.4% 11.6 11.8 20 bps
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Salt Lake City, UT 14.56 15.28 4.9% 12.2 12 -20 bps
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Top 5 Sell Markets 4Q 2017 2021 Change in Rents 4Q 2017 Vacancies 2021 Vacancies Change in
Rents ($ psf) Rents ($ psf) (%) (%) (%) Vacancies (bps)
--- ------------ ------------ --- --- --- --------------
Detroit, MI 15.54 15.21 -2.1% 11.2 12.1 90 bps
----------- ----- ----- ---- ---- ---- ------
Kansas City, MO 12.58 12.27 -2.5% 11.4 11.9 50 bps
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Chicago, IL 17.73 17.41 -1.8% 12.6 13.1 50 bps
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Northern NJ 26.12 25.68 -1.7% 8.1 8.9 80 bps
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Memphis, TN 12.44 12.36 -0.6% 13.1 14.2 110 bps
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US 18.24 18.67 2.4% 10.0 10.3 20 bps
--- ----- ----- --- ---- ---- ------
The Retail Sector's Top Five 'Buy' Markets:
Austin, Texas
Austin's retail outlook has been buoyed by healthy population and job growth, as well as low unemployment rates of 2.9 percent. According to Reis, the city's retail vacancies have edged up slightly from their recent lows to 5.5 percent. Vacancies have dwelled near this level since early 2016 and are set to remain in the same range through 2021. Effective rents have risen steadily since mid-2012 and are now growing approximately 3 percent a year. While this growth rate is likely to slow amid the 2019-2020 stress test in Ten-X Commercial's model, effective rents are not predicted to fall. These stable vacancies and consistently rising rents will result in NOI gains of 3.1 percent in 2018, followed by growth in the mid-1 percent range from 2019 through 2021.
Denver
Denver's exceptionally robust job market, its reputation as a desirable place to live and record rent levels make it a strong option for real estate investors looking to purchase retail assets. Denver's unemployment rate is extremely tight at 3 percent and the city's population growth rate has outstripped the national average for decades. Retail vacancies have fallen nearly 300 bps to 9.2 percent, according to Reis. Vacancies are projected to decline further this year then edge up again into the low 9 percent range through 2021. Rents, which are at an all-time peak, are projected to continue rising through 2021. NOI growth is likely to slow to 3.9 percent this year and then decelerate further. However, rising rents and low vacancies will prevent a contraction.
Houston
Houston's local economy has recently been ramping up, which has increased the appeal of retail properties. Employment in Houston grew 2.2 percent year over year, bringing it above the 3 million mark and reaching an all-time high. Professional/business services continues to be the key economic driver with this sector, posting gains of 4.6 percent from the previous year. Additionally, after steep declines in 2015-2017, Houston's dominant energy sector grew 4.2 percent from a year ago. While heavy completions have pulled the vacancy rate into the high 10 percent/low 11 percent range, effective rents have managed to grow for 28 consecutive quarters to reach an all-time peak. Strong demand is expected to continue pulling rents upward. NOIs will grow 2.4 percent in 2018, before averaging 1.5 percent growth in the subsequent three years.
Dallas
Dallas's healthy economic growth continues unabated and demand for retail space in the city remains strong. Per Reis, retail net absorption has been positive for 14 straight quarters, despite steady completions, and vacancies have dropped 340 bps from their peak to 11.6 percent. Effective rents are at an all-time high following 30 consecutive quarters of growth and are up 2.4 percent year over year. Vacancies will dip slightly in 2018 and will remain in the high-11 percent range through 2021, even during the 2019-2020 forecasted recession. Rent growth is seen continuing slowly but steadily. As a result, annual NOIs are seen rising 2.4 percent in 2018, and then 1.2 percent per year in 2019-2021.
Salt Lake City
Salt Lake City continues to add jobs ahead of the national pace and the metro is enjoying healthy population growth. In contrast to many other metros throughout the U.S., the city continues to see strong retail sector hiring as retail jobs in Salt Lake City have reached their highest level on record. Four consecutive quarters of positive demand, coupled with an empty supply pipeline, have driven the city's retail vacancies down 70 bps to 12.2 percent, per Reis. Vacancies have hovered in the 12-13 percent range throughout the cycle and are only expected to increase modestly during the forecast period. Effective rents have grown in 12 of the last 15 quarters, most recently jumping 4.3 percent on the year to reach their cyclical peak. While rent and NOIs are expected to see slowed growth in 2018 and contraction in 2019-2020, both are then projected to rebound above their current levels in 2021.
The Retail Sector's Top Five 'Sell' Markets:
Detroit
The outlook for Detroit retail is poor as the local economy is weakening and the city's population remains stagnant. In 2017, Detroit's employment growth slowed to 0.9 percent, the weakest pace of the current cycle. While jobs are at a cyclical peak, they have yet to regain their prior high and the city's 4.6 percent unemployment rate is higher than the national average. Despite very few completions, retail absorption in Detroit has been negative for the last three quarters. Vacancies, now at 11.2 percent, are seen climbing both in 2018 and during Ten-X Commercial's 2019-2020 modelled recession. Effective rents are expected to rise minimally in 2018, then contract during the recessionary scenario. As fundamentals deteriorate, NOI is projected to decline an aggregate 3.4 percent through 2021.
Kansas City, Mo.
Kansas City's retail jobs have posted annual declines in each of the last six months, crimping demand for retail space and acting as a drag on economic growth. Meanwhile, retail vacancies and rents are both rapidly eroding. Negative demand has pushed Kansas City retail vacancies up 90 bps in 2017 to 11.4 percent, per Reis. Effective rents fell last year for the first time since 2014 and rents are currently only 6 percent higher than their recessionary trough. Ten-X Commercial forecasts rents remaining unchanged this year, then deteriorating during the 2019-2020 modelled economic downturn. NOIs are expected to decline by 1.9 percent per year in that time period, while vacancies rise.
Chicago
Chicago's population fell in 2017 for the third straight year. The city is struggling with weak job growth and an unemployment rate well above the national average. The city's retail sector has also been hampered by sliding rents and retail vacancies that jumped to 12.6 percent, just 30 bps below their 2014 peak. Vacancies are expected to rise north of 13 percent during Ten-X Commercial's 2019-2020 stress test years. Both effective rents and NOIs are seen rising minimally in 2018, then contracting during, and after, the 2019-2020 modeled downturn.
Northern New Jersey
Total employment figures in Northern New Jersey are growing at a slow pace, while the population grew just 0.5 percent in 2017. The market's retail vacancy rate has risen almost 300 bps since 2013, as uneven demand meets with a steady supply pipeline. While demand is projected to remain positive throughout the 2019-2020 modelled recession, it will fail to offset new supply. The retail vacancy rate is likely to edge above 9 percent in 2019 and then decline slightly over the following two years, as the supply pipeline slows. NOI will likely fall 1.6 percent per year in 2019 and 2020, with only a modest bump at the onset of economic recovery in 2021.
Memphis, Tenn.
Memphis' population only grew 0.2 percent in 2017, with similarly weak growth in the preceding four years. Per Reis, retail vacancies rose to 13.1 percent in 2017 getting close to their highest levels of the cycle. Rents remain only 1.5 percent above their pre-recession peak and are expected to see decelerated growth in 2018 before contracting in the modelled 2019-2020 recession. New supply will overwhelm uneven demand, sending vacancies into the mid 13 percent range through 2020, and then above 14 percent in 2021. NOI is projected to contract in 2020 and 2021, even as the national economy begins its recovery.
About Ten-X Commercial
Ten-X Commercial is the nation's leading online, end-to-end transaction platform for commercial real estate. Since 2009, the company has sold more than $18 billion in commercial real estate. The company blends data-driven technology with industry expertise to accelerate close rates and streamline the entire transaction process. Ten-X Commercial and its parent company, Ten-X, are headquartered in Irvine and Silicon Valley, Calif., with offices in key markets nationwide. Investors in the company include Thomas H. Lee Partners, L.P., CapitalG (formerly Google Capital) and Stone Point Capital.
CONTACT: Amanda Ferraro, Beckerman, 201-649-1186, aferraro@beckermanpr.com
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