Ten-X Research: Latest U.S. Retail Market Outlook Shows Sector's Growth Has Slowed To 'Low Water Mark'

Ten-X Research identifies Austin, Texas, Denver, Dallas, Salt Lake City and San Jose, Calif. as top 'Buy' markets for retail investors

IRVINE, Calif. and SILICON VALLEY, Calif., Nov. 2, 2017 /PRNewswire/ -- Ten-X, the nation's leading online real estate marketplace, today released its latest U.S. Retail Market Outlook, including the top five 'Buy' and 'Sell' markets for retail real estate assets. The long-term forecast depicts a retail sector in the midst of an already agonizingly slow recovery that has now reached a low water mark for the current cycle.

 (PRNewsfoto/Ten-X)

Blame for the "non-recovery" can be laid largely at the feet of technology companies and non-traditional retailers, whose disruption of traditional brick-and-mortar has continued unabated – most spectacularly with Amazon's purchase of Whole Foods. The impact of headwinds created by consumers' shift to e-commerce, and the uncertainty it has created, cannot be overstated. Ten-X Research expects the sector to wrestle with these challenges for years to come.

The long-term forecast suggests investors should consider buying retail assets in Austin, Denver, Dallas, Salt Lake City and San Jose. These markets, clustered largely in the Southwest, have been able to defy the forces working against retail thanks to expanding populations, job and wage growth, and increasing shopper counts.

Kansas City, Memphis, Cleveland, Northern New Jersey and Pittsburgh are the top markets in which investors might consider selling retail properties. These cities face adverse retailing conditions due to either economic struggles or the double whammy of slow population growth and high rents.

The Ten-X Research report notes that e-commerce – the sector's most formidable secular challenge and risk factor – continues to grab a larger share of shoppers' spending. It now comprises 14.4 percent of total non-auto retail sales, up from less than 10 percent five years ago. With more people shopping from the comfort of home, in-store inventory needs have declined. Consumers are still shopping, but more sales are being fulfilled from warehouses while retail's per-person footprint continues to shrink. As a result, the warehouse and distribution sector has been the beneficiary of e-commerce's hegemonic rise.

"The rise of online shopping puts extreme pressure on the recovery of the retail sector, demonstrated most clearly by bankruptcies of storied retail chains, sweeping store closures, and shrinking footprints," said Ten-X Chief Economist Peter Muoio. "For now, the sector is being sustained by strong economies and high incomes in some regions around the country but it faces the risk of stagnation should an economic downturn strike."

Effective rents rose 1.8 percent in the second quarter from a year ago, a growth rate unchanged from the first quarter of the year. Vacancies ticked up by 10 bps to 10 percent and have now risen 20 bps over the last year. Overall deal volume in the sector sagged to a 4-year low of $14.6 billion.

2Q 2017 – 2021 U.S. RETAIL PROJECTIONS


Top 5 Buy
Markets

2016 Final
Effective Rents
($ psf)

20/20 Forecast
Effective Rents
($ psf)

Change in Rents
(%)

2Q 2017
Vacancies (%)

2021 Vacancies
(%)

Change in
Vacancies (bps)

Austin, TX

21.05

23.38

11.1%

5.3

4.3

-100 bps

Denver, CO

16.42

18.08

10.1%

9.7

9.4

-30 bps

Dallas, TX

16.02

17.50

9.2%

11.7

11.6

-10 bps

Salt Lake City, UT

14.19

15.01

5.8%

12.5

11.6

-90 bps

San Jose, CA

31.52

33.12

5.1%

5.2

6.7

150 bps

Top 5 Sell
Markets

2Q 2017 Rents
($ psf)

2021 Rents
($ psf)

Change in Rents
(%)

2Q 2017
Vacancies (%)

2021 Vacancies
(%)

Change in
Vacancies (bps)

Kansas City, MO

12.57

12.30

-2.2 %

11.2

12.2

100 bps

Memphis, TN

12.33

12.22

-0.9%

13.4

14.9

150 bps

Cleveland, OH

13.61

13.31

-2.2%

15.7

16.9

120 bps

Northern NJ

26.19

25.92

-1.0%

8.6

9.1

50 bps

Pittsburgh, PA

15.37

15.07

-2.0%

9.1

9.9

80 bps

US

18.05

18.77

4.0%

10.0

10.2

20 bps

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

Austin, Texas

Austin's retail sector has benefited from the city's eye-popping population growth, which measured 2.9 percent in 2016 – the strongest of large U.S. metro areas for the sixth year in a row. Despite the steady influx of new residents, the city's seasonally adjusted unemployment rate is down to a 17-year low of 2.9 percent with education and healthcare acting as primary job-creation engines. Though the city's vacancy rate edged up 10 bps to 5.3 percent, Ten-X Research expects it to decline to 4.3 percent by 2018 and then remain in that range through 2021. Even taking into account a modeled 2019-2020 recession, rents are projected to make steady annual gains in the mid 2 percent range through 2021 annually. The combination of rising rents coupled with declining vacancies make Austin retail properties an appealing target for investors.

Denver

Denver's retail sector looks resilient even in the face of a recessionary scenario modeled by Ten-X beginning in 2019. Net operating income (NOI) growth is forecasted to remain in positive territory through 2021, growing 4 percent until 2018, and then eking out gains in the mid-1 percent range until 2021. Vacancies, now at 9.7 percent, are expected to decline slightly in 2018 then remain in the mid-9 percent range in the three years to follow. The city's resilience in the face of retail's various headwinds is attributed to rising employment, which is now at an all-time peak, and impressive population growth.

Dallas

A burgeoning economy has meant retail space remains in demand in Dallas. Retail net absorption in the city has been positive for 12 quarters in a row. The vacancy rate is down 330 bps from its peak of 11.7 percent and is forecasted to remain in a mid-11 percent range through 2021. Rents have jumped 3.2 percent from a year ago to reach an all-time peak. Growth drivers for the Dallas economy include robust job creation in professional and business services as well as financial services. Coupled with a population that is expanding at a healthy 2.1 percent clip, all bodes well for its retail prospects.  

Salt Lake City

Salt Lake City retail properties make for appealing targets for investors, especially those willing to ride out the 2019-2020 recessionary scenario modeled by Ten-X Research. Following that projected downturn, an economic rebound is projected to pull retail vacancies down to 11.6 percent by 2021. In the interim, the vacancy rate is expected to hit a low of 11.8 percent in 2018 – down from its current level of 12.5 percent. Annual NOI gains are expected to average 3.2 percent through 2018, before grinding to a halt during the modeled recession. Notably, Salt Lake City is the rare U.S. city that is currently seeing strong retail hiring with jobs in the sector up more than 3 percent from a year ago. Both across-the-board employment growth and accelerating population growth further add to the city's appeal for retail investors.

San Jose, Calif.

The affluent population in San Jose – where per capita income measured $81,592 in 2015 – is a boon for retail and consumer spending, making retail properties in the city good targets for investors. In fact, the city's retail outlook is a model of strength, including a vacancy rate of 5.2 percent and rent growth of 4.6 percent from a year ago. Investors should note that that the downturn modeled for 2019-2020 creates a significant volatility risk as a tech bust or slowdown would weigh on incomes. This in turn, would lead to spiking vacancies, stymied rent growth, and NOI declines. Still, Ten-X Research forecasts NOI regaining positive momentum in 2021.

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

Kansas City, Mo.

Kansas City's retail outlook is deteriorating and neither population growth nor low unemployment appear to be enough to offset worsening fundamentals. The vacancy rate is now at 11.2 percent, a jump of 110 bps over the last five quarters, and is projected to rise above 12 percent in the coming years. Ten-X Research expects NOI to fall in 2017, grow a negligible 0.1 percent in 2018 and drop 2 percent per year during Ten-X Research's 2019-2020 recessionary scenario. Moreover, economic growth in the city cannot be characterized as robust. Employment growth has slowed sharply in the past six months to 0.2 percent and demand for retail space has been hurt by a drop in retail trade jobs over the last year.

Memphis, Tenn.

With retail NOI projected to fall in four of the next five years and finish 2021 below current levels, investors in Memphis are among those who may consider selling their assets. Population growth has been nearly nonexistent over the last four years, while unemployment rate remains higher than the national average. The vacancy rate is forecasted to settle near a whopping 15 percent in 2021 following the modeled 2019-2020 recession, up from its current level of 13.4 percent. Meager rent growth of 0.4 percent compared to a year ago does little to improve the city's overall picture.

Cleveland

Cleveland's economy continues to be plagued by the baggage of decades-worth of industrial decline and its retail sector is suffering in tandem. The city's population has contracted 19 of the last 20 years. The unemployment rate is above the national average at 6.1 percent, up from a year ago. Owners of retail properties in the city should gird themselves for a deteriorating market outlook through 2021. Ten-X Research projects the vacancy rate will likely rise to nearly 17 percent during that time, up from the current 15.7 percent rate. While NOI is projected to grow marginally through 2018, it is likely to lose those gains during the modeled 2019-2020 recession, before a tepid rebound below 1 percent in 2021.

Northern New Jersey

According to Ten-X Research, plentiful available space hampers prospects for retail property owners in Northern New Jersey. The region's vacancy rate has already risen 60 bps over the last year to 8.6 percent and is projected to reach the low-9 percent range by 2021. NOI is forecast to drop 0.7 percent annually through 2020 before returning to growth of less than 1 percent in 2021. These weak retail fundamentals are further challenged by tepid employment growth and slowing population growth.

Pittsburgh

Demand for Pittsburgh retail space is weak and rents are experiencing tepid growth, making for an unimpressive outlook for retail investors. Vacancies are projected to rise to around 10 percent in 2021, even with little new supply in the pipeline. Investors should expect rent growth of under 1 percent a year in both 2017 and 2018, followed by three years of declines. The city's economy is expanding, but barely, as current job growth measures just 1 percent. Population contracted in 2016 for the fourth year in a row and unemployment remains higher than the national average.

About Ten-X
Ten-X is the nation's leading online real estate transaction marketplace and the parent to Auction.com, Ten-X Commercial and Ten-X Homes. To date, the company has sold 300,000+ residential and commercial properties totaling over $50 billion. Leveraging desktop and mobile technology, Ten-X allows people to safely and easily complete real estate transactions online. Ten-X is headquartered in Irvine and Silicon Valley, Calif., and has offices in key markets nationwide. Investors in the company include Thomas H. Lee Partners, L.P. CapitalG (formerly Google Capital) and Stone Point Capital. For more information, visit Ten-X.com.

SOURCE Ten-X Commercial

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