IRVINE AND SILICON VALLEY, Calif. – Oct. 15, 2015 – Auction.com, LLC, the nation’s leading online real estate marketplace, today released its rankings of the retail sector’s top buy and sell markets based on current and expected fundamentals. Fort Lauderdale, Florida, Miami, Austin, Texas, Los Angeles and San Jose, California, notched spots on Auction.com’s list of top buy markets thanks to growing rents and low vacancy projections. Meanwhile, investors of retail properties in Baltimore, Pittsburgh, St. Louis, Detroit and Philadelphia might consider selling as vacancies and rents are expected to remain stagnant through at least 2019.
“The retail sector has been surprisingly robust, considering some of the headwinds it’s facing, and continues to recover as rents rise and absorption drives vacancies to a new post-recession low,” said Auction.com Executive Vice President Rick Sharga. “Part of the reason for this is that retail construction has been scaled back significantly compared to pre-recession levels. But we’re also seeing positive trends in major, coastal markets in California and Florida where resurgent housing markets and higher household incomes boost retail sales.”
Auction.com’s latest Retail Market Outlook Report shows consistency in the retail sector across most nationwide markets, as local economies and spending habits continue pacing the retail environment. Retail fundamentals have continued their slow-but-steady recovery as vacancies reach a new post-recession low of 10.1 percent, which is an improvement of 30 basis points from one year ago and just 100 bps below the 2011 post recession peak. The strongest markets include Fort Lauderdale and Miami, where household income is high and vacancies are projected to plummet through 2019.
“The retail sector still has not seen absorption numbers come close to what they were pre-recession, as e-retail sales climb and affect retail space, creating less need for inventory,” said Auction.com Chief Economist Peter Muoio. “As e-retail expands, store footprints continue to shrink. While e-retail is helping drive absorption in distribution and fulfillment centers, it continues to be a drag on retail space and is contributing toward the trend of smaller store footprints with less space warranted for inventory. However, absorption continues to outpace supply, as it has in 14 of the past 15 quarters, and this is driving vacancy rates down.”
The Retail Sector’s Top Five Buy Markets*:
Fort Lauderdale, Florida
A housing revitalization is benefitting Fort Lauderdale’s economy, which is also being bolstered by a hospitality sector seeing rapid year-over-year job growth in the 4-percent range. Retail vacancies and effective rents are poised to greatly surpass U.S. averages by 2019 on the heels of this improved demand. The metro saw 3.3 percent effective rent growth in 2014, which should continue to accelerate in the coming years. Only modest supply additions have been made, and absorption is up, with an average of 106,000 square feet of absorption per quarter over the last six quarters. Employment in the metro is seeing annual growth of 3.4-percent range while unemployment trends below the national average, lending economic support to the sector.
Miami’s economy is on the uptick with a sunny outlook as its hospitality sector has extended its employment peak with jobs up 5.9 percent year-over-year. Miami’s 6.2 percent retail vacancy rate is projected to drop into the upper-3-percent range by the end of the forecast period. Absorption has outpaced completions in each of the last four quarters and year-over-year rent growth in the metro was 4.5 percent in the second quarter, compared to just 2.1 percent nationwide.
Austin’s retail market is one of the few in the U.S. that is poised to benefit from both vacancy declines and strong rent growth in the coming years. Metro absorption in Austin has outpaced completions in all but one quarter over the past two years, while the vacancy rate is down to 6.3 percent — well below the national average. Vacancies should continue declining while effective rent growth accelerates. Effective rents capped off the second quarter of 2015 with a 4.2 percent effective rent increase over a year ago.
Employment in L.A. is at an all-time peak with year-over-year growth trending in the 2-percent range, though higher unemployment still is an issue. Retail vacancies there are already tight (in the low-6-percent range) but strong rent growth will drive the bulk of NOI gains — expected to average 3.6 percent growth per year by 2019. Low vacancies are driving strong effective rent growth of 3.8 percent currently, which will accelerate to the low- to mid-4-percent range, before cooling again to 3 percent in 2019.
San Jose is poised for ample rent growth thanks to miniscule vacancies. The local economy continues to expand at a torrid pace, driven primarily by supercharged tech industry growth. San Jose has seen some of the strongest recent job growth in the U.S., with employment up 6.2 percent year-over-year. Vacancies are well below the national average at 4.7 percent and rents are up 5 percent year-over-year, which is a massive acceleration from the 1 percent growth rate seen as recently as 2013.
The Retail Sector’s Top Five Sell Markets*:
Though Baltimore’s economy has surged recently, the pace of expansion will cool in the coming months and years. Retail absorption has been inconsistent and fleeting, and a range-bound vacancy forecast is hurting NOI prospects — Auction.com projects Baltimore averaging just 0.6-percent NOI growth per year through 2019. Vacancies are up to 6.6 percent and rent is up just 1.5 percent from a year ago and isn’t projected to see growth above 2 percent per year until 2017 at the earliest.
Pittsburgh is experiencing slow economic growth and a declining population putting the Steel City’s retail market in line for weak, uneven demand, and slow effective rent growth. Projected NOI growth there should average a meager 0.7 percent per year through 2019 and Pittsburgh’s vacancy rate will not make appreciable improvements from its current 8 percent level by the end of 2019.
St. Louis’ economy is recovering very slowly and the retail market will continue to struggle with meager effective rent growth due to this tepid backdrop. NOI is projected to grow to average just 0.9 percent per year through 2019, while absorption has been net negative in the past six quarters, pushing the vacancy rate up to 12.8 percent. Vacancies are projected to remain near the 12 percent range through 2019.
Economic growth in Detroit is hampered by a dire fiscal situation and high crime rate, crimping gains. Though there’s been some recent improvement, employment there is still 11.8 percent short of its pre-recession peak. Retail vacancies of 11.8 percent are much higher than the national average, with not much improvement in sight due to the economic malaise. NOI growth is projected to average just 1 percent per year through 2019.
Economic expansion in Philadelphia will be slow to develop and the city’s retail market will see vacancies rise above the U.S. rate by 2019 and effective rents drop below the national average as demand and growth in the metro lag. Vacancies will remain mired in the low-9-percent range through 2019, constraining effective rent growth to just 1.3 percent per year during the forecast. Philadelphia NOI growth is forecasted to average just 1.1 percent per year through 2019.
*Data source for Top Buy/Sell Markets: REIS, Auction.com Research forecasts.
Auction.com, LLC, is the nation’s leading online real estate marketplace. Founded in 2007, the company has sold more than $32 billion in residential and commercial real estate assets. Auction.com has over 900 employees and headquarters in Irvine and Silicon Valley, Calif., as well as offices in key markets nationwide. Visit www.auction.com for more information.