By Meghan Hall
The first half of 2017 was challenging for brick-and-mortar stores, with numerous retailers such as Macy’s and J.C. Penney announcing sweeping store closures across the U.S. According to experts at Reis, a New York-based commercial real estate research company, the media frenzy surrounding store closures is overblown.
“The reality is better than the news media would lead one to believe,” says Barbara Denham Reis’ senior economist.
Brick-and-mortar stores will survive, the research finds despite a tough market. On top of that, Reis determined that neither a saturated retail market nor a large number of store closures have had much of an impact on retail rents.
Retail development exploded in the 1980s and 1990s alongside the rapidly growing housing market and continued at a rapid pace up until the 2008 recession. When the economy weakened, demand for retail plummeted. During the Great Recession, vacancy rates in community centers reached a peak of 11 percent in 2011.
The average vacancy rate in regional and community shopping centers was 10 percent in Q2 of 2017, a difference of only a single percentage point. “Right now, brick-and-mortar retail is dealing with shifting and declining demand for space,” says Reis’ Chief Economist and Senior Vice President Victor Calanog.
Prior to the recession, vacancy rates in retail centers were around 5.8 percent.
There is a general consensus among experts that the U.S retail market is over-retailed, but little has been done to analyze what impact, if any, a saturated market has on retail rents. Using data from 2015 and 2016, Reis tracked 80 metros and compared retail employment to population in order to determine which markets were over-retailed.
The metro with the highest ratio of retail employees per 1,000 residents, and therefore classified as the most “over-retailed,” was Little Rock, Arkansas, with 66 retail employees for every 1,000 residents. Syracuse had 62 retail employees per 1,000 residents, while Omaha and Orlando tied for third with 61 retail employees per 1,000 residents. Seattle finished out Reis’ list of over-retailed metros, alongside five other cities, with 58 retail employees per 1,000 residents.
The least over-retailed metros Reis measured included major cities in California. The San Bernardino-Riverside metro reported 39 retail employees per 1,000 residents, while Oakland and the San Francisco East Bay had 40 retail employees per 1,000 residents. Los Angeles and Tucson had 41 retail employees per 1,000 residents. Tacoma, Washington also made the list for least-over retailed metros with 42 retail employees per 1,000 residents.
The U.S Metro Average is 50 retail employees per 1,000 residents. However, even the most saturated markets still reported rent growth between 2013 and 2017. Little Rock and Syracuse saw a 2.6 percent and 2.3 percent increase in rent growth, respectively.
Oakland saw 7.6 percent increase in retail rents, while Los Angeles saw a 9.4 percent increase. However, the San Bernardino-Riverside area, which earned the distinction of “least over-retailed metro,” only saw a 2.6 percent increase in retail rents, the same amount of growth that was reported in Little Rock.
Seattle, an over-retailed market, experienced a 6.8 percent rent growth whereas nearby Tacoma, an under-retailed market, reported 6.9 percent increase.
While under-retailed markets experience more rent growth than those that are over-retailed, Reis found that the correlation between market saturation and retail rents was relatively weak. Other variables such as population growth tend to have a much more significant impact on retail rents.
“The vast majority of our over-retailed metros are less densely populated, more rural markets as opposed to major metropolitan areas,” says Calanog. “Similarly, the majority of our under-retailed metros are in primary markets, with Californian cities representing six of the top twelve markets.”
Of the factors that affect retail rents, the recent wave of store closures across the United States is not one of them. Widespread closures have had very little influence on retail rents across the country. Reis has tracked 470 store closures in 77 out of the 80 primary metros that it tracks. Many store closures include major retailers such as Walmart, Kmart, Sports Authority and Kohl’s.
Sports Authority had the highest number of store closures, accounting for 28 percent of the 28.9 million square feet of total closures. Macy’s is in the process of closing 6.7 million square feet, and Kmart has closed 4.3 million square feet of store space.
New Orleans had the highest percentage of store closures between 2015 and 2016. The city saw 566,112 square feet of closures which made up 8 percent of its inventory. Long Island, although in second place percentage-wise, saw a much smaller proportion of closures. Long Island experienced 897,158 square feet of closures, which represents about 3.7 percent of its inventory.
Seattle and Tacoma were also among the top 20 metros with the highest percentage of store closures. 2.6 percent of Tacoma’s retail inventory and 2.5 percent of Seattle’s retail inventory closed between 2015 and 2016.
When comparing changes in rent growth to the percentage of stores closed, Reis found that the correlation coefficient between the two variables was just 5.4 percent. A higher percentage of closed stores should lead a decline in rent growth, but in actuality this has not been the case.
Out of the 20 metros with the highest percentage of store closings, 10 showed a deceleration in rent growth. Only five posted an actual decline in rent growth. Out of all 80 metros, 13 reported a decline in rent growth in Q4 of 2016. Two of the 13 metros had no major store closings.
“All-in-all, Reis is projecting vacancies to stay relatively flat and year-over-year rent growth around 1.5 percent, so the situation is certainly not as dire as it seems,” says Calanog.
Reis found that while there is a relationship between store closings and rent declines, the relationship is indirect. Like market saturation, other factors such as an evolving retail industry and e-commerce are more likely to have a significant effect on retail rents.
