While it continues to lag the recovery seen in office and industrial markets, the retail real estate sector did achieve positive net absorption, a stable vacancy, and a near-stabilization of rent in the first quarter, according to research from CoStar Group, which provides information and analytics to the commercial real estate industry.
The report showed that while net absorption slowed slightly compared to the last half of 2011, rent trends generally improved from prior quarters, supported by a lack of new space being added to the market.
“We may not be out of the woods just yet, but the data we've compiled for the first quarter certainly demonstrates an ongoing recovery and points towards future growth,” stated Walter Page, Director of Research for CoStar's Property and Portfolio Research division. “While the retail recovery was less pronounced than in the office and warehouse sectors, we're witnessing positive net absorption across the board.”
For the first quarter, vacancy nationally of retail space was unchanged at 7%, compared to 7.3% one year earlier. Net absorption of 9.4 million square feet was below the 16.2 million square feet of the fourth quarter. Retail completions were exceptionally low at just 4.3 million square feet, with a Salt Lake City urban retail project being one of the largest deliveries this quarter.
“We forecast completions of retail space to remain depressed for the year,” Page said. “In-process construction continues to fall compared to office and warehouse construction, which is rising slightly.”
At the metro level, retail performance was more of a mixed bag than other property types, with few standout markets. For example, market rent over the past year ranged in a narrow band with most markets showing a -5% to +2% change, as the impact of housing market distress and Internet retailing has curtailed demand growth. For the quarter, roughly one-third of the markets recorded negative net absorption, suggesting that the retail recovery is still weak. Market vacancy rates range from 2.8% in San Francisco to 12.1% in Phoenix.
Strip shopping center vacancy rate drops for first time since 2005
CoStar’s report generally jibed with conclusions in a report released April 10 by its competitor REIS Inc. and reported on by Reuters. That report found the average vacancy rate at U.S. strip malls fell for the first time in nearly seven years in the first quarter and rents inched up.
REIS reported the national vacancy rate for strip malls, which are favored by many specialty retailers, fell to 10.9 percent from 11 percent in the fourth quarter of 2011. That marked the first decline in seven years. The average asking rental rate reached $19.05 per square foot, up just 0.1 percent from the fourth quarter. The average effective rent, which excludes free rent and other incentives, also increase 0.1 percent to $16.57 per square foot.
Strip malls are also referred to as neighborhood shopping centers and are often anchored by grocery of drug stores. Vacancy rates at such center had been rising since 2005.
Still, REIS said retail remains among the hardest hit of the commercial real estate markets, in part because on continuing pressure from online retailers. Best Buy Co. Inc., for instance, recently said it would close 50 big box stores and open 100 smaller ones focused on mobile phones in a move many observers saw as a response to growing competition from Amazon.com.
