Ten-X Retail Report: The Good Buys and the Bad Buys

Ten-X's latest retail outlook report identifies the top five "buy" and "sell" retail real estate markets in the U.S.

By Barbra Murray, Contributing Editor

Peter Muoio, Ten-X
Peter Muoio, Ten-X

Irvine & Silicon Valley, Calif.—Ten-X has presented its insight on the current state of the retail real estate sector with the release of its latest U.S. Retail Market Outlook. The online real estate marketplace highlights the top five metro areas where investors would be wise to buyor selland why.

There’s nothing wrong with being predictable, especially in real estate. “Most of the results were anticipated, as retail fundamentals have been mostly tracking local economic performance throughout the cycle as the supply side has been muted, and there has been little variance as to market economic performance aside from Houston,” Peter Muoio, chief economist with Ten-X, told Commercial Property Executive.

For the retail sector, the Great Recession may be in the rearview mirror, but it’s in the mirror nevertheless. The almighty world of e-commercepresently accounting for 13 percent of all retail sales, and growingis one major obstacle on the road to full recovery. Still, there are those markets that are ripe for investment.

Austin’s got the right recipe for retail investment: a thriving economy with good long-term prospects; a population that continues to grow well above the national rate; and the invaluable combination of limited supply and strong demand. Furthermore, come 2018, the vacancy rate will have decreased to less than 5 percent and rents will have climbed by more than 4 percent. The investment environment in San Francisco is none too shabby either. Unemployment is at a mere 3 percent, annual job growth is averaging at 4 percent and the tech industry is keeping it all going.

Then there’s Florida; three cities in the Sunshine State are on Ten-X’s “buy” list. The Fort Lauderdale and West Palm Beach retail sectors are being buoyed by increasing population growth and above-average employment numbers, paving the way for NOI growth of roughly 4.2 percent and 4 percent, respectively, for the next few years. Additionally, Ten-X forecasts that both markets will be able to withstand the additional supply that will come online. Miami is in fine shape as well, with rents having increased more than 4 percent over the last year and vacancies on track to drop below 4 percent by 2018. And a dry development pipeline completes the package in Miami.

At the other end of the spectrum, the good isn’t good enough to outweigh the bad in the cities landing in Ten-X’s “sell” category. In Milwaukee, the unemployment rate is below the U.S. average, but population and employment growth remain on the low end and the economy continues to suffer. Detroit’s population is finally on the upswing, but with tepid demand resulting in increasing vacancy rates, a downswing in the retail sector is on the horizon. A combination of low population growth and a relatively high vacancy rate induced by weak demand is also the cause for St. Louis’ presence on the “sell” list. Memphis’ notable improvement in employment numbers, spurred by the transportation and utilities sectors, and constrained retail development deliveries aren’t sufficient to guard the relatively high 10 percent vacancy rate from a sharp increase ahead. Rounding out the “sell” category is Philadelphia, where the accelerating economy is doing nothing to increase population growth or bring down the unemployment rate, which exceeds the U.S. average. Low demand will keep the city’s retail vacancy rate at 10 percent for the next few years.

It appears investors in summer attire will fare better than their winterwear-clad counterparts. “There is something to the fact that all the buy markets are in sunny metros. The ‘Sun Belt’ and these metros with better climates have been seeing stronger population growth than the U.S. overalland colder areas such as the Midwest and Northeastdue to people migrating to them, in part for their superior weather,” Muoio said. “This backdrop of stronger demographics has fueled more robust local economic growth, which has fed into stronger retail fundamentals.”

Image courtesy of Ten-X