Research - APRIL 7, 2014

U.S. retail looks to perform in 2014

by Reg Clodfelter

The expected addition of 2.7 million new jobs and GDP growth forecast at 2.5 percent to 3 percent in 2014 has retail market fundamentals all trending upward in 2014, according to Marcus & Millichap’s 2014 National Retail Report.

Growth in national economic fundamentals will also supplement increased consumer capabilities from the “wealth effect” in the middle class created by housing and equity appreciation, all of which has led to projected vacancy rate declines in every market in the report’s National Retail Index.   

Retail sales per capita are at an all-time high, 10 percent higher than past peaks, propelling retailer corporate profits to an all-time high as well. Total NOI for shopping centers increased by 7 percent in 2013, the highest jump in five years, and now a projected drop in nationwide vacancy rates of 70 basis points should result in national rent growth averaging 2.5 percent.

Though New York City retained the top spot on the report’s National Retail Index with strong growth in both employment and tourism, California is trending upward with four markets in the top 10 — San Francisco (No. 2), San Jose (No. 3), San Diego (No. 6) and Los Angeles (No. 10) — all of which moved up the index since 2013. A fifth California market, Orange County, remained high at No. 11 but dropped six spots from 2013.

Texas markets look strong as well, benefiting from robust economic performance, with four MSAs in the top 15, Austin (No. 4), Houston (No. 9), Dallas–Fort Worth (No. 13) and San Antonio (No. 15).

Midwest markets trended downward, spurred by underperforming employment prospects and weaker market fundamentals. Milwaukee (No. 40), Kansas City, Mo. (No. 43), Detroit (No. 45) and Cleveland (No. 46) all dropped on the index, with the Midwest’s strongest market, Columbus, Ohio (No. 33), remaining idle.

Investment in retail property totaled $78.3 billion in 2013, an increase of 5.5 percent, with REITs and private buyers accounting for 70 percent of sales volume. Cap rates for the sector remain higher than 10-year Treasury yields by 380 basis points for single-tenant properties and 470 basis points for multi-tenant properties. Though single-tenant properties remain safer than multi-tenant properties due to lower vacancy rates (vacancy rates for multi-tenant properties are currently averaging 9.3 percent), multi-tenant properties are still priced below past peaks and have average yields that are 90 basis points higher than single-tenant assets.

All data obtained from Marcus & Millichap’s 2014 National Retail report.


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