By PETER MOERSCH
The first sign of out-of-control demand returning to normal levels usually is an increase in vacancy for retail space.
Retail net absorption was in the negative territory for the first time in many quarters in the second quarter. But the news is not as grim as it may initially appear. Vacancy rates still are in a range best described as “phenomenal,” with across the board vacancy at 3.5%. The highest amount of vacancy is in the specialty category, where vacancy rates still are less than 5%.
The greater issue on most minds is overall retail sales on a national basis, which dropped by 0.1% in June and rebounded in July with a 1.4% increase from a year earlier.
Retail vacancies and the trend in retail sales can be attributed to consolidation among many chains, or, as is the case with the video rental industry, shrinking to better compete with online and direct merchants. Stores such as Good Guys, Toys R Us and Albertsons have scaled back while continuing to restructure their companies.
As investors look at the retail real estate market, they are bullish for two reasons. First, net absorption only was slightly negative despite the increase in retail space coming to market. More than 1.9 million square feet are coming to market through construction.
As any tenant representative broker will tell you, “A” markets are oversubscribed and have multiple selections of tenants to choose from. “B” and “C” markets still are finding that the centers come to market fully leased, and there are quality tenants for well-designed projects.
Secondly, the consumer price index has topped 4% for the first time in years. Inflation is being calculated into the rents. Projected incomes for existing centers are growing much more consistently with the increase in real estate values.
Market lease transactions will help landlords keep pace with the market and help maintain the increase in value of retail centers despite increases in interest rates. At the same time, interest rate increases from the Federal Reserve have slowed.
Overall, there have been more active indicators than there have been in quite some time. The market can best be described as “optimistic,” which is slightly off the “unrealistically enthusiastic.” Most think a little stability for the market is a good thing.
Moersch is a vice president in the Anaheim office of CB Richard Ellis Group Inc.
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