Retail Rents Rising As Vacancies Fall

Retail rental rates are going up as vacancies go down.

It’s a good time to be a commercial property landlord, apparently.

Thanks to a robust U.S. economy powered by consumer spending, vacant retail rental space is forecasted to decline in the next several years, while rental prices are forecasted to rise, according to Cushman & Wakefield’s recently released U.S. Macro Forecast.

Cushman & Wakefield predicts that demand for retail space will largely focus on Class A rental locations, mainly occupied by luxury retail brands, seeing the highest levels of demand, the lowest vacancy levels and a growth in rental prices.

“The bifurcation in retail property performance based upon class will only accelerate,” according to the forecast. “While this trend has lasted for the past five years, the gulf between Class A and Class C properties will widen more significantly heading into 2017.”

As the demand for Class A properties increases and the availability of these types of rental spaces diminishes, it could further depress the Class B rental property market, although Cushman & Wakefield sees opportunities for some Class B rental properties in the right markets to punch above their weight (primarily because Class A properties will be in such short supply).

“Class B properties unable to improve their position will increasingly fall into the extremely challenged Class C category,” according to the forecast. “Class B properties able to withstand this trend include those in urban settings, well-situated locations and the beneficiaries of significant capital investments that lure top-level tenants.”

Cushman & Wakefield also predicts that traditional retailers and brands — think Macy’s, Nordstrom, Abercrombie & Fitch — will continue to suffer at the hands of off-price, third-party and discount retailers, although those trends might begin slowing down, too.

“Department store and apparel users — particularly those publicly traded — will remain in sharp contraction mode,” according to the forecast. “Off-price apparel, dollar stores and discounters will remain in growth mode, but these retailers will increasingly face the challenge of market saturation after seven consecutive years of aggressive growth.”

Cushman & Wakefield also predicts a big shakeup for the restaurant industry by 2017, with older brands and chains falling victim to newer, hipper dining options.

“Food users (restaurants and grocery stores) will remain in growth mode, but saturation will increasingly lead to closures, with older casual-dining concepts the biggest losers,” according to the forecast.

Over the next two years, a total of 65.3 million square feet of additional retail space is expected to be rented out, pushing the vacancy rate down to 7.6 percent in 2016 from 8 percent in 2015; the retail vacancy rate is expected to drop to 7.3 percent by 2017, according to the forecast.

Due to the increasing lack of supply of retail rental locations, Cushman & Wakefield forecasts rents will climb by 4.6 percent in 2016 but begin to level out in 2017 when an 1.5 percent increase is expected.

So, what’s fueling this surge in retail rental space acquisition and rent hikes?

Surprisingly, it’s a resilient U.S. economy that has survived tumult from overseas markets for much of 2016 (China’s weakening economy, fears brought on by the Brexit vote and slumping commodity prices) and the U.S. workforce growing to its largest level in years, which, in turn, is fueling greater consumer confidence and spending.

“The clear strength of the labor markets, combined with low energy and gas prices, has fueled a resilient and robustly spending consumer,” according to the forecast. “In fact, in the second quarter of 2016, consumer spending contributed 2.8 percent to GDP growth — the second-strongest quarterly contribution this cycle.”

Cushman & Wakefield notes that vehicle sales are nearing record high numbers and home sales have seen their highest totals in years, which, in turn, is fueling growth in industrial production and factory orders.

Consumer spending on nondurable goods is expected to increase 2.5 percent in 2016 and another 2.8 percent in 2017, according to the forecast. Spending on durable goods — which auto sales contribute to — is expected to increase by 2.6 percent in 2016 and 3.4 percent in 2017.