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Retail Market Continues To Struggle In Q2 2019 Though Overall Sentiment For Strategic Investments Remains Strong
Friday, November 8, 2019

Data from Ten-X Commercial shows continued growth of e-commerce, combined with store closures and a steady decline in M&A transactions, has led to a weak national retail market

IRVINE and SILICON VALLEY, Calif., Nov. 5, 2019 /PRNewswire/ -- Ten-X Commercial, the nation's leading transaction platform powering 90% of all online commercial real estate sales, today released its latest Retail Market Outlook, which shows little to no improvement within the sector. In addition to the top five 'Buy' and 'Sell' U.S. markets for retail properties, the report also found that while consumer spending is on the rise amidst a booming labor market, the retail sector is largely suffering.

Due to the popularity of online shopping, brick and mortar retailers continue to struggle, leading major brands such as J.C. Penney, Bed Bath & Beyond, CVS and Forever 21 to close store locations. E-commerce has doubled its total share of retail sales over the last decade reaching an all-time high of 16.5% of all non-auto sales. According to Coresight Research, more than 8,560 store closures have already been announced year-to-date in 2019, a drastic increase from 2018's 5,524.

Due to store closures, retail space absorption has been poor and developers have scaled back construction of new retail spaces as a result. Vacancy rates are largely stagnant around the 10% mark, remaining just above their 2016 cycle low. Despite the lack of improvement in vacancy rates, effective rents in the retail sector made some headway and grew 1.7% year-over-year in Q2 2019.

While the rise of e-retail has benefitted other CRE sectors, such as increasing demand for warehouse space in the industrial sector, it is only one of many negative factors affecting the retail market. Trade wars will continue to have a damaging impact on the retail sector and the overall economy if they are not resolved.

Looking ahead, new construction is expected to continue its slowdown through 2021 with vacancies predicted to increase slightly to 10.6% by the end of 2020 - matching its highest mark since 2013. Based on an expected recession, new development is expected to bounce back in 2022, leading vacancies to decrease to 10.2% by Q4 2022 - relatively on par with their current level.

Effective rent growth is also predicted to continue slowing down, reaching 1.1% by the end of 2019 and turning negative in 2020 for the first time in a decade. Rent prices are then expected to begin a recovery process, growing by 1.4% in 2021 and 1.8% in 2022, ultimately reaching $18.92 per square foot.

Retail total deal volume also declined in the second quarter of 2019. According to RCA data, transaction volume totaled $16.2 billion in Q2 2019 - a 21% year-over-year decrease. However, total deal volume in 2018 was particularly high, peaking in the third quarter when Brookfield Property Partners acquired GGP. This single transaction comprised half of the deal volume in Q3 2018, falsely inflating total transaction volume for the year. During this time period, the average sales price for retail space continued to grow by marginal amounts, reaching $244 per square foot - a 2.5% increase from Q2 2018.

The Ten-X Commercial Retail Valuation Index, which also includes data from beyond Q2 2019, predicts that the retail market will continue to weaken through 2020. As vacancies rise, rent prices drop and cap rates increase, the Ten-X Retail Valuation Index is expected to fall by 10% in 2020. In the following year, cap rates are predicted to decline again as fundamentals improve slightly, leading valuations to increase more than 14% in 2021-2022.

Additional insights from the Ten-X Commercial Retail Nowcast, which gauges real-time property pricing dynamics using live bidding and market activity data on the Ten-X Commercial platform, demonstrates a regional disparity in retail pricing, with investor sentiment relatively strong in the Southeast due to strong local economies and population growth, but much weaker than the Northeast.

In contrast to a nationally weak retail market, retail transaction activity on the Ten-X Commercial increased. Total visits to retail Property Display Pages (PDPs) have increased 35% since Q3 2018, the highest it's been in four years. Similarly, the number of visitors to Ten-X Commercial's due diligence document vaults for retail properties has increased 22% year-over-year, and is on track to reach an all-time peak by the end of 2019. Furthermore, the total number of retail assets brought-to-auction on the platform is up 22% since the third quarter of 2018, with growth expected to continue through the end of the year.

"Despite a struggling retail market, overall sentiment for strategic retail investments remains strong, as demonstrated by the increase in PDPs, vault visits and rising listings on the platform," said Ten-X Chief Economist Peter Muoio. "The retail sector will remain relatively weak through 2020 as the sector contends with both cyclical and secular headwinds buffeting it. Thereafter, cyclical headwinds will dissipate somewhat, alleviating the pressures on retail demand somewhat."

The Retail Sector's Top Five 'Buy' & 'Sell' Markets


              Top 5 Buy                    2022           Change in                             2022  
              Change in
                   Markets             Forecast                             Rents ,      Forecast                                     Vacancies,
                                                Rents ($ psf) Present -                             Vacancies (%)       Present -
                                                                         2022 (%)                                     2022 (bps)

    ---                                                                                                                                      ---

        Austin, TX                                     23.80                  +6.8%                           6.4     
            -90 bps


        San Francisco, CA                              36.25                  +4.0%                           3.2     
            -40 bps


        Orlando, FL                                    18.29                  +4.0%                           9.5      
            0 bps


        Houston, TX                                    17.42                  +4.0%                          11.8     
            -10 bps


        Dallas, TX                                     17.34                  +4.5%                          11.6     
            -50 bps


              Top 5 Sell                   2022           Change in    
             2022 Forecast     
              Change in
                   Markets             Forecast                             Rents,                  Vacancies (%)                    Vacancies,
                                                Rents ($ psf) Present -                                                  Present -
                                                                         2022 (%)                                     2022 (bps)

    ---                                                                                                                                      ---

        Milwaukee, WI                                  14.12                  -1.7%                          13.8     
            +40 bps


        Pittsburgh, PA                                 15.71                  -1.8%                           9.4     
            -80 bps


        Oakland-East Bay, CA                           27.91                  -2.1%                           7.8      
            0 bps


        Cleveland, OH                                  13.73                  -0.9%                          13.9     
            +50 bps


        Northern NJ                                    26.33                  -0.9%                           9.0     
            +30 bps


        US                                             18.92                  +1.0%                          10.2     
            +10 bps


The Retail Sector's Top Five 'Buy' Markets:

Along with the east coast, California and Florida, retail acquisition activity is heavily concentrated in Texas, making Austin one of the top 'Buy' markets nationwide. By 2022, rent prices in Austin are projected to increase by 6.8%, reaching $23.80 per square foot. Vacancy levels are expected to drop by 90 bps to 6.4%, signaling a relatively strong outlook.

San Francisco
Located in another state with steady retail acquisition, San Francisco is also a promising 'Buy' market in the retail sector. Pricing per square foot is expected to increase by 4% to $36.25 by 2020. Vacancy levels are forecasted to decrease by 40 bps, reaching only 3.2% - the lowest projected vacancy rate in the country.

According to Ten-X Commercial's market research, cities in the Southeast have particularly strong demographics, including Orlando. By 2022, rental unit pricing in Orlando is projected to increase by 4% to $18.29 per square foot, while vacancy rates are expected to remain stagnant at 9.5%.

Like Austin, Houston is another top 'Buy' market in Texas, largely due to the city's booming local economy supported by its resurgent energy sector. Houston is expected to see a 4% increase in retail rent prices, reaching $17.42 per square foot by 2022. Vacancy rates are projected to slightly decrease, ultimately reaching 11.8% - relatively on par with 2Q 2019.

The third city in Texas to be considered a top 'Buy' market, Dallas is expected to see rent prices increase by 4.5% to $17.34 per square foot. An overall positive forecast, vacancy rates are projected to drop by 50 bps to 11.6% in the next two years.

The Retail Sector's Top Five 'Sell' Markets:

A top 'Sell' market, rent prices per square foot in Milwaukee are forecasted to decrease by 1.7%, while vacancy rates are expected to rise 40 bps, reaching a total of 13.8% by 2022. As the Midwest continues to struggle, Milwaukee will see additional retailers closing their brick and mortar storefronts in the face of e-commerce.

According to Ten-X Commercial's research, investor sentiment for retail properties remains weak in Pittsburgh. Local rent prices are projected to drop by 1.8% to $15.71 per square foot by 2020. During this time, vacancy levels are also projected to decrease to 9.4%.

Oakland-East Bay
Unlike San Francisco, which was named a top 'Buy' market by Ten-X Commercial, the retail sector outlook in Oakland-East Bay is not promising. Rent pricing is forecasted to decrease by 2.1% to $27.91 per square foot and vacancies are expected to remain unchanged at 7.8%.

Similar to Milwaukee, Cleveland is a problematic area for the retail sector. The city will continue to see a lack of demand for retail space, with rent per square foot projected to decrease by 0.9% to $13.73 in 2022. Retail vacancy rates are expected to rise 50 bps, reaching a problematic 13.9%.

Northern NJ
Retail sales are continuing to experience a heightened slowdown across states in the Northeast, including New Jersey. Due to an increase in brick and mortar store closures, Northern New Jersey has a dim outlook, with average rent per square foot expected to fall by 0.9% and vacancies forecasted to increase to 9% in 2022.

About Ten-X Commercial
Ten-X Commercial is the leading end-to-end transaction platform for commercial real estate that powers more than 90% of all online CRE sales. Our platform empowers brokers, sellers and buyers with data-driven technology and comprehensive transaction tools to expand market visibility and decrease time to close. Ten-X Commercial is headquartered in Irvine and Silicon Valley, Calif., with offices in key markets nationwide. Investors in the company include Thomas H. Lee Partners, L.P., CapitalG (formerly Google Capital) and Stone Point Capital.

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SOURCE Ten-X Commercial

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