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The Key Factors Driving Retail Recovery

Retail real estate recovery has lagged, compared to other sectors. But rising rents and gradually declining vacancy rates across the country equal opportunities for savvy investors. Here are some of the biggest changes in today's retail sector, which is rapidly becoming an area you'll want to play in.

1. Declining Vacancy Rates

The Key Factors Driving Retail Recovery

JLL national retail leasing EVP Holly Rome (left, with director of research Jim Cook) says retail is holding its own. The Q3 retail availability rate of 11.3% is now 200 bps below its post-recession peak of 13.3% in Q2 2011.  

2. A Wider Range of Shops

The Key Factors Driving Retail Recovery

Holly says the merchandising mix in larger malls and shopping centers is a major factor in the retail recovery. The stores, entertainment and dining options a mall offers can fill a community’s needs and drive traffic to the storefronts. Example: more quick serve and fast casual restaurants are adding alcohol to menus as a way to attract customers and boost sales. Jim says buyers have focused on buying Class-A malls, but as rents increase and owners hold on to properties, there are growing opportunities for Class-B and C malls in secondary and tertiary markets.

3. Urban Retail Is Driving Pricing

The Key Factors Driving Retail Recovery

Jim says urban retail continues to lead overall per SF pricing, with a 17.5% increase over 2014. Urban “gateway markets” such as New York’s Fifth Avenue, Chicago’s Michigan Avenue (shown) and San Francisco have some of the lowest vacancy rates in the country.

4. More Luxury Experiences

The Key Factors Driving Retail Recovery

One popular value-add: movie theaters are adding upscale amenities like lounge seating, food and drinks. Holly says cineplex operators are doing as much business, if not more, with this model versus standard seating. She adds that JLL worked with AMC Theatres in renovating 138 sites across the country.

5. Empty Box Flexibility

The Key Factors Driving Retail Recovery

There are some concerns about NOI erosion due to recent department store struggles. Holly says she hears questions about what to do if some Sears stores shutter. Do landlords find another retailer to fill the box? Do they break it up into multiple storefronts? Holly says this question will challenge owners and managers moving forward, but it also opens up opportunities for redevelopment and value-add.