Retails Recovery Gains Traction, Gradually

The vacancy rate for neigborhood and community centers improved 10 bps during Q1.

NEW YORK CITYAlthough retails recovery hasnt gathered speed as yet, it has become more consistent, Reis Inc. said Friday. Furthermore, the real estate analytics firm sees this year as, possibly, the year that improvement in market fundamentals begins to accelerate.

Underpinning this measured optimism is the broader economic recovery, with Reis chief economist, Ryan Severino, noting that 2015 could be the best year for labor market performance since the late 1990s. The quality of the jobs being created continues to improve which means higher incomes and higher income growth. Cheap energy prices should continue to be a boon for most consumers as they adjust their behavior to correspond with structurally lower oil prices in addition to structurally lower natural gas prices.

Following the trend of recent quarters, neighborhood and community center vacancy declined by just 10 basis points during the quarter to 10.1%, as did that of regional malls, which dipped to 7.9% in Q1.

Severino notes that while neither net absorption nor construction were particularly robust, demand exceeded supply by a wide enough margin to cause vacancy rates to continue falling. For neighborhood and community centers, vacancy has dipped by 10 bps in three of the past four quarters. This is hardly a resounding victory for this retail subsector, but this needs to be put in its proper contextjust a 40 basis-point annual decline in vacancy would be the best performance since 2000 during the dot.com bubble, Severino says.

In the case of the shopping mall segment, the 10-bp improvement followed a 10-bp vacancy increase during Q4 of 2014. Rents, however, have grown for malls in each of the past 16 quarters. As with malls, neighborhood and community centers saw rent growth during Q1, and as with malls, it was a relatively modest 0.5%.

Although rent growth remains weak, the fact that it even continues to grow in the face of such an elevated vacancy rate is a mildly heartening sign for the sector, according to Severino. Although Reis expects rent growth to accelerate as this year progresses, expect the acceleration to be slight due to the still-high vacancy rate.

Taken together, the data for both neighborhood and community centers and malls indicate that the recovery, while not yet accelerating, is becoming more consistent, Severino says. Quarterly rent growth is now the norm and continues to drift higher while vacancy compression, though slowing for regional malls, is also beginning to occur on a quarterly basis.

The quarterly improvement in market fundamentals should persist as the year progresses, says Severino. Inclement weather was a factor in weak consumer spending during Q1, yet as the weather becomes more temperate, a surging economy and labor market, coupled with low oil prices, should continue to support consumer spending and we expect to see an improvement in demand for retail space for the balance of the year.

In addition, Severino says, construction remained at low levels during the first quarter and is not set to change anytime soon. The combination of little supply growth and increasing demand bodes well for most retail formats in the US.

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Retails Recovery Gains Traction, Gradually