National Retail Vacancy Approaches Record Low

Scott Holmes, national director of retail in Marcus & Millichap’s Phoenix office, noted in his last Retail Insight Q&A that the national retail vacancy rate at the end of 2017 was 5.1 percent. Holmes and his team believe this rate may hit or even fall below 5 percent this year. Retail Insight sat down with Holmes once again to discuss this trend more in depth, particularly as news surrounding store closures, consolidations and threats from e-commerce continue to swirl.

Retail Insight:You mentioned in Retail Insight’s last Q&A that the national retail vacancy is at an all-time low. Why do you think this is?

Holmes:Economic growth and expansion, coupled with low additions to the supply of retail space are largely responsible for this. After 2008, supply of new retail space dropped off dramatically compared to historic levels. Much of what little new supply has been added has been build-to-suit, or significantly pre-leased prior to the start of construction.

Retail Insight:Do you believe this record-low vacancy trend will continue?

Holmes:Yes, I do. We project slightly further declining vacancy rates for retail space in the U.S. Individual markets will vary but, in general, in metros where economic and job growth is projected, such as Seattle and Tampa, Florida, we should see further vacancy declines. This would include the suburban areas of these metros. Secondary and tertiary markets will continue to lag behind primary markets.

Retail Insight:Which markets are the tightest when it comes to retail vacancy, and which still have room to grow?

Holmes:Those that have made big moves recently but where vacancies are still significantly above the national average, such as Phoenix, Las Vegas and Sacramento, for example, would be the markets that still have the most room for further positive movement.

Retail Insight:How is this tight occupancy trend continuing, particularly as so many larger department store and big boxes close, while others are requiring less space due to omnichannel platforms and online shopping?

Holmes:The overall growth of the economy and total retail sales — of which over 90 percent is physical retail — continue to outpace closings and downsizing by retailers. E-commerce moving into physical retail space is a trend that is expected to continue, and has a small positive effect in this area, but by far, most of the demand is still from what would be considered traditional retailers, which are making moves to become true omnichannel solutions for their customers.

Retail Insight:Will this supply-constrained environment result in new shopping centers being built?

Holmes:Capital markets are still relatively conservative and will continue to direct new funds for development to grocery-anchored and smaller, local “needs-based” retail centers. Power centers, lifestyle and malls are still largely out of favor, and will have difficulty getting funded, except in the best locations. Lenders and equity investors are still requiring significant pre-leasing for any new developments.

This article originally appeared in the Retail Insight newsletter by Shopping Center Business. This is a six-week publication created in conjunction with our content partners, which sponsor the newsletter, leading up to ICSC RECon and including post-conference coverage. Click here to subscribe.