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Retail Headlines Vs. Reality

By Fain Hicks, Senior Director, Capital Markets – Retail Investment Sales

No other property type has faced the onslaught of punishing – even apocalyptic – headlines like the retail sector has in recent years. There is no denying that significant disruption has occurred within the retail sector as a whole as a result of multiple systemic factors including oversupply, rapidly changing consumer behavior, absence of retailer innovation, shifting demographics and over-levered or vulnerable retailer financial conditions.

However, not all retail is created equal and a closer look at the current fundamentals of open-air or strip, neighborhood, community, power and lifestyle centers in the Southeast results in a compelling, bullish case differing greatly from headline sentiment.

Open-air shopping centers are visited by consumers at least once a week, if not daily in many cases. Open-air centers are where consumers go to for a multitude of necessity, service, experiential and entertainment uses, including buying groceries, dining, working out, getting a haircut, etc.

For the Southeast (Alabama, Georgia, North Carolina, South Carolina and Tennessee), the reality is that open-air shopping centers are performing at their strongest fundamental levels of this cycle. Through Q4 2018 the key metrics of vacancy rate (6.1%), average market base rent ($15.17 psf) and average market sales price ($149.52 psf) are at their most attractive points in the last 10 years and since the Great Recession. The following table (Table 1) shows the significant percentage improvement of these key metrics since their “worst” quarterly result during this period.

A critical driver of the strength of the Southeastern open-air retail market is the disciplined amount of new supply. In addition to being 97% less than the peak amount, the Q4 2018 under construction inventory of 251,974 sf is at just 6.9% of the 10-year historical quarterly average of 3.75 msf of under-construction inventory.

The Southeast is a strong economic engine fueled by job creation and population growth meaningfully outpacing national averages in both categories. Remarkably, these attractive economic factors coupled with restrained new supply have resulted in the open-air retail inventory per capita decreasing 4% during this period to 18.45 sf per person.

There certainly could be pockets of additional turbulence and continued tenant and landlord innovation is expected within the open-air retail sector. Nevertheless, the data on fundamentals is compelling and indicates open-air retail properties are poised for sustained success and should continue to offer attractive relative yields. Be careful to not just read the headlines and miss the reality.

To download a PDF of this report, click here.

Sources: Cushman & Wakefield Research, CoStar, Real Capital Analytics     

With over 20 years of commercial real estate experience, Fain Hicks is dedicated to providing institutional, private and individual owners, investors and developers with an unrivaled level of knowledgeable, comprehensive transaction services for all types of retail real estate.

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