Video may have killed the radio star, but has e-commerce done the same to your local retail establishment? Will the rise of everything from Amazon to Zappos take down the bookstore up the street, your local shoe store? Don’t bet on it.
While the much-touted demise of good old fashioned, bricks-and-mortar stores makes for good headlines, it’s not actually based in fact.
According to JLL’s Cross Sector Outlook released this spring, despite e-commerce’s leaps and bounds over the last few years, it still represents a relatively small percentage of total retail sales—6.0% to be exact. Your shoe store is safe for now, and probably well into the future.
“Remember catalogs? Flipping through the pages, dialing up a call center and placing an order? Web sales are really just replacing that,” said Kris Cooper, Managing Director, JLL Capital Markets. “People still need to see and touch things; the instant gratification of an in-store purchase can’t be discounted. Retailers who want to thrive will need to incorporate it all—hands-on goods, e-commerce and mobile-commerce.”
Despite these emerging structural challenges and newly-announced store closings, such as those of Radio Shack, Office Depot, and Coldwater Creek, the U.S. retail sector has continued on its solid recovery and is exhibiting tightening market conditions.
Cap rates compressed by approximately 20 basis points in 2013 as rent growth is expected to increase to 2.7% in 2014. Vacancy rates are also expected to compress another 20 basis points by the end of this year.
Right now, power centers, in particular, are punching above their weight class, experiencing the tightest overall market conditions with a total vacancy rate of just 5.1%.
A FEEDING FRENZY
What does this mean for the health of the retail investment sales and financing market? Investors have wasted no time hopping back on the retail bandwagon, particularly in core markets where new product often produces a “feeding frenzy.”
In February, Savanna purchased 10 Madison Square West in New York for more than $2,900 per square foot ($60 million). Price appreciation for retail product was outstanding in 2013; the Moody’s/RCA CPPI for retail is expected to post a 23% increase for the year—and reach similar numbers by the end of 2014.
“Right now, it’s all about high-quality, grocery-anchored centers and trophy malls," said Margaret Caldwell, Managing Director, JLL’s Capital Markets. "Demand for those asset types is incredible right now—if only we could convince all the owners to bring those to market. Investment in the gateway cities is strong, as always—but watch for a few dark horses to emerge in the coming months. Markets like Phoenix and Indianapolis could make some real headway by the end of the year.”
In the financing arena, debt is plentiful as balance sheet lenders such as life insurance companies are increasing their allocations in 2014 and remain competitive, while domestic banks continue to report stronger demand for commercial property loans. CMBS money is also plentiful, with retail collateralizing 20 percent of all CMBS deals in the first quarter of 2014.
“Watch for equity to make some significant strides in the retail space in the coming year, as well,” said Mark Brandenburg, Executive Vice President, JLL’s Capital Markets. “For a long time, equity sponsors were holding back, waiting to see if retail would survive the e-commerce invasion. Now that things have settled down a bit, many of those JV equity players are under allocated in the retail space and they’ll need to make some big plays to balance things out.”
Brandenburg also advises investors to keep their eyes on secondary markets as the borrowing rates for primary versus secondary markets don’t vary much.
“Leveraged yields into secondary and tertiary markets will be higher for the same quality real estate due to positive leverage between borrowing rates and cap rates,” he concluded.
About JLL's Retail Group
JLL’s Retail Group serves as the industry’s leader in retail real estate services. The firm’s more than 850 dedicated retail experts in the Americas partner with investors and occupiers around the globe to support and shape investment and site selection strategies.
Its retail specialists provide independent and expert advice to clients, backed by industry-leading research that delivers maximum value throughout the entire lifecycle of an asset or lease. The firm has more than 80 retail brokerage experts spanning 20 major markets, representing more than 100 retail clients. As the largest third party retail property manager in the United States, JLL’s retail portfolio has 305 centers, totaling 65.7 million square feet under management in regional malls, lifestyle centers, grocery-anchored centers, power centers, central business districts, transportation facilities and mixed-use projects.
For more, visit www.jllretail.com.
Related Stories
Market Data | Apr 16, 2024
The average U.S. contractor has 8.2 months worth of construction work in the pipeline, as of March 2024
Associated Builders and Contractors reported today that its Construction Backlog Indicator increased to 8.2 months in March from 8.1 months in February, according to an ABC member survey conducted March 20 to April 3. The reading is down 0.5 months from March 2023.
Laboratories | Apr 15, 2024
HGA unveils plans to transform an abandoned rock quarry into a new research and innovation campus
In the coastal town of Manchester-by-the-Sea, Mass., an abandoned rock quarry will be transformed into a new research and innovation campus designed by HGA. The campus will reuse and upcycle the granite left onsite. The project for Cell Signaling Technology (CST), a life sciences technology company, will turn an environmentally depleted site into a net-zero laboratory campus, with building electrification and onsite renewables.
Codes and Standards | Apr 12, 2024
ICC eliminates building electrification provisions from 2024 update
The International Code Council stripped out provisions from the 2024 update to the International Energy Conservation Code (IECC) that would have included beefed up circuitry for hooking up electric appliances and car chargers.
Urban Planning | Apr 12, 2024
Popular Denver e-bike voucher program aids carbon reduction goals
Denver’s e-bike voucher program that helps citizens pay for e-bikes, a component of the city’s carbon reduction plan, has proven extremely popular with residents. Earlier this year, Denver’s effort to get residents to swap some motor vehicle trips for bike trips ran out of vouchers in less than 10 minutes after the program opened to online applications.
Laboratories | Apr 12, 2024
Life science construction completions will peak this year, then drop off substantially
There will be a record amount of construction completions in the U.S. life science market in 2024, followed by a dramatic drop in 2025, according to CBRE. In 2024, 21.3 million sf of life science space will be completed in the 13 largest U.S. markets. That’s up from 13.9 million sf last year and 5.6 million sf in 2022.
Multifamily Housing | Apr 12, 2024
Habitat starts leasing Cassidy on Canal, a new luxury rental high-rise in Chicago
New 33-story Class A rental tower, designed by SCB, will offer 343 rental units.
Student Housing | Apr 12, 2024
Construction begins on Auburn University’s new first-year residence hall
The new first-year residence hall along Auburn University's Haley Concourse.
K-12 Schools | Apr 11, 2024
Eric Dinges named CEO of PBK
Eric Dinges named CEO of PBK Architects, Houston.
Construction Costs | Apr 11, 2024
Construction materials prices increase 0.4% in March 2024
Construction input prices increased 0.4% in March compared to the previous month, according to an Associated Builders and Contractors analysis of the U.S. Bureau of Labor Statistics’ Producer Price Index data released today. Nonresidential construction input prices also increased 0.4% for the month.
Healthcare Facilities | Apr 11, 2024
The just cause in behavioral health design: Make it right
NAC Architecture shares strategies for approaching behavioral health design collaboratively and thoughtfully, rather than simply applying a set of blanket rules.