'Tis the Season

December 6, 2018

Source: REIS Source: REIS

Every year, it seems the holiday season sneaks up on us faster than the previous year. With an earlier Thanksgiving than usual, holiday shoppers have benefited from extra shopping days to find the perfect gifts for family and friends. Retailers have taken advantage of this too and begun promotions early. The International Council of Shopping Centers estimated that 151 million people visited a mall or shopping center over the holiday weekend. According to Adobe, Cyber Monday sales broke a record with $7.9 billion spent online, up 19.3% from last year. With the holiday season in full swing, I wanted to revisit the state of the retail market.

While negative headline news surrounding store closures persisted for much of this year, it is important to put these closures in perspective. Department store-anchored regional malls have borne the brunt of retail underperformance. According to Coresight Research, year-to-date store closures have totaled 5,468 while there have been 3,060 store-opening announcements. Not all retail has been affected equally, however. Discount retailers have done very well and compose the majority of store openings. Other types of retail properties such as outlet centers, super-regional malls and neighborhood community centers have demonstrated stronger performance. Neighborhood grocery and restaurant-anchored retailers continue to see solid demand and falling vacancies.

This week’s chart depicts the trends in effective rent for U.S. metro retail properties along with changes in vacancy rates. While vacancy rates are not back to their pre-crisis lows, they have proven resilient given the record number of store closures. Meanwhile, there has been a steady rise in rent growth over the past several years. Average rents continue to increase, supported by rising consumer confidence and a growing economy.

Anchor store departures, such as Sears, could present opportunities for landlords to redevelop sites and increase rents in core markets. Replacing struggling retailers with higher-quality, in-demand tenants will allow property owners to drive more traffic to these properties while increasing revenue and value. As underperforming malls close, top-tier malls are gaining favor, and have been redesigned with more experiential options.

Key Takeaway
Despite some signs of a slowdown in the retail sector due to regional mall vacancies, overall rent growth has remained positive. When evaluating retail risk and exposure within your portfolio, it is important to analyze the submarket exposure, property type and surrounding competition. Investors should focus on higher-quality assets that are supported by favorable demographics. While brick-and-mortar retailers are undergoing transformation, they remain essential. Improving consumer balance sheets and low unemployment should continue to help certain retailers.

Tags: retail rent growth | vacancy rate | retail properties

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The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.

This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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