Although the long-term forecast for retail properties remains cloudy as e-commerce market share grows and consumer behavior changes, there are some cities that present better prospects for retail sector investors than others.
Ten-X, an online real estate marketplace based in Irvine, California, has identified Miami; Fort Lauderdale, Florida; Houston; Austin, Texas; and Tampa, Florida, as the best markets for retail property investors. These sunbelt markets are enjoying strong local economies boosted by job and population growth.
In contrast, the markets Ten-X suggests that retail property investors consider exiting are impacted by weak economic and demographic indicators. Lack of population growth in these markets, and weak demand, have hurt retail properties. This list includes Baltimore; Oakland, California.; Milwaukee; Cleveland; and Memphis, Tennessee.
E-commerce now accounts for 13% of retail industry sales, Ten-X reports, causing retail fundamentals to grow very slowly. The e-tail share has been gaining for years and shows no sign of letdown, causing major retailers to downsize or shutter store locations. Hedge funds have also been expressing their pessimism on retail properties, further hurting the sector, by going short on real estate investment trust stock, and bonds tied to retail properties.
“Consumers have been turning away from traditional retail for years, which is creating a more challenged and fraught landscape for investors,” said Ten-X chief economist Peter Muoio. “The problems inhibiting retail’s growth are anything but a passing phase, and the mounting shift toward online shopping ensures the sector will continue to face a steep climb on its road to recovery.”
Looking into the cities that Ten-X sees as promising for retail, the online marketplace reports that Miami is enjoying an “all-time high” in retail property rent growth, with greater than 3% growth anticipated for 2018. Vacancies are at a low 5.7%, driving up net operating incomes 10% for 2017, which should slow down to 4.3% growth for 2018.
In Fort Lauderdale, even though more retail supply entered the market in 2016, vacancies dipped to 8.9% and “effective rents” were up 2.8%. Rents should continue to grow and Ten-X is forecasting net operating income growth of higher than 4% through 2018.
In Tampa, although the vacancy rate rose to 10.8% for 2016, with new supply entering the market, retail rents still rose 4.2%, and retail job growth was up 2.9%. The forecast for Tampa is for 4.5% growth in net operating income through 2018.
Moving to Texas, although the hit to oil prices has been a drag on the Houston economy, the city’s retail sector jobs grew 5.1% in the past year, thanks to strong population growth. Even though 1.7 million square feet of new supply came to the market in 2016, vacancies and rents haven’t been impacted. Ten-X projects an annual return of 3.8% through 2018 for this market.
Austin has also seen strong growth in retail jobs, and the city’s vacancy rate is down to 5.5%, despite new supply being added. Rents should continue to grow through 2018 as supply slows down.
However, Muoio cautions, “While healthy economic conditions and strong housing markets are fueling the sector in some areas of the Southeast and West, even those regions would bear the brunt of weakening absorption and falling rents that could push vacancies to recession-era levels in the event of any cyclical economic headwinds.”