Retail Property Market Gets Boost from Housing Recovery, Strenthening Local Economies

Despite High Profile Bankruptcies and Mergers, Retailers Finding Ways to Open New Stores As Consumers Regain Buying Power

With more housing bust markets like Phoenix, Las Vegas, the Inland Empire and Sacramento continuing to gain jobs and economic strength, retailers absorbed about 13 million square feet of neighborhood and strip shopping center space in 2014 -- double the lev of demand of the previous year -- and retail vacancies have fallen below 10% for the first time since the recession in 2008.

Those were among the key findings presented at CoStar's State of the U.S. Retail Market 2014 Review and Forecast, presented by Suzanne Mulvee, director of U.S. research, retail; and Ryan McCullough, senior real estate economist, for CoStar Portfolio Strategy.

In particular, the analysts noted the long-awaited lift from recovering home prices and hiring seen at year-end for local neighborhood shopping centers and their small business and boutique tenants. While this retail center segment still has a lot of ground to make up relative to faster-recovering power centers and malls, demand is now beginning to ramp up, McCullough said.

"We've seen net absorption really come on strong and vacancies are starting to fall quite quickly" due to the limited amount of new retail construction, stated McCullough.

Meanwhile, the $43 billion of retail property sales transacted in 2014 surpassed the amount of retail property sold in 2007 to set a new rcord as the strongest year for transaction volume, with continued low interest rates lifting investor demand. Pricing for retail property has risen about 38% from its 2009 trough, according to the latest CoStar Commercial Repeat Sale Index (CCRSI). Also, the average sale price per square foot paid for retail is rising the fastest among the six top U.S. metros, especially for luxury shopping properties in New York City, Southern California and Miami.

Both investor and tenant demand for retail property, which has wobbled up and down for several years, have now tiered-up steadily over the last several quarters. Despite the negative headlines on store closures by Radio Shack and other national chains, "retailers are finding a way to open new stores, and demand is not only positive, it's rising," Mulvee points out.

Job growth and wage gains, combined with the drop in gasoline prices, continue to provide a boost for consumers, retailers and landlords alike across the country. Sustained $2-a-gallon gasoline could boost consumption and lift retail sales by as much as 5%, according to a CoStar Portfolio Strategy analysis of U.S. Energy Information Administration data.

Nationally for all retail property, the vacancy rate fell another 20 basis points to 6.3% to close 2014 and net absorption of shopping space totaled 81 million for the year, both are the strongest readings since 2008.

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Retail Property Market Gets Boost from Housing Recovery, Strenthening Local Economies