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Steady Fundamentals Suggest Retail Poised To End The Year Strong

National Retail

Retail, despite thousands of store closings and hundreds of bankruptcies filed this year, is not in the dire straits that dominate headlines. In fact, while retail may be bifurcated, it is also thriving in spots.

A Cermak Fresh Market in Chicago's Bridgeport neighborhood.

According to a new report from JLL, retail fundamentals remain stable despite the continued fluctuations in the sector, and that could create the foundation for increased activity in 2017’s back end.

JLL’s midyear retail investment outlook revealed a 20% decline in total vacancy in the first half of 2017, while investment sales declined 18.7% to $27B during that same time frame. Yet net absorption and new retail completions remained flat, increasing 5% per square foot.

The lack of significant new retail development is not a bad thing, JLL Executive Vice President Janice Sellis said, particularly considering the overbuilt state of the sector. There remains an excess of retail real estate, which was the case prior to the financial crisis and before e-commerce gained momentum and really started eating away at brick-and-mortar stores’ sales. The overbuilt state of the sector has hurt retailer's productivity and sales per square foot, resulting in a large number of closures.

This year construction has been constrained, and retail has entered 2017 healthy from a supply standpoint. And the bifurcation of retail real estate is more pronounced. Sellis said that retail is now a market of haves and have-nots. Urban retail locations and “Main on Main” power centers continue to attract investor and tenant demand, while centers in inferior locations are struggling.

Charlestowne Mall, St. Charles

Retail’s fluctuations are being felt hardest in secondary markets. Investors are fleeing secondary markets in droves. Secondary market investment plummeted 59.9% in the first half of 2017, and acquisition activity from institutional investors and REITs has flipped nearly 180 degrees from 2016’s midway point. Institutional mall investment in secondary markets plummeted 94.9% in the first half of 2017, while REIT activity dropped 96.3%.

Sellis said that this softening of the market is because investors are flocking to more stable opportunities in prime markets. It is possible that institutional investors and REITs cannot capitalize in these questionable markets because they have to answer to advisers or stockholders. But this softening in the secondary market can create good opportunities for private investors with capital and patience, seeking good locations and long-term holds.

Even grocery-anchored retail — long considered among the most stable investments in retail in recent years — saw a drop-off in activity. Investment sales for grocery-anchored retail declined 31.1% in H1. In the first six months of 2016, grocery investment increased 54% as investors viewed them as safe havens.

Sellis said that the decline in activity among grocery-anchored retail appeared worse than it is. There were no major portfolio sales of grocery-anchored shopping centers in 2017’s first half, and investors are cautious and prefer to see how supermarket retail evolves. Trends like deliveries, prepared foods and pickup and go services are planting deeper roots with grocery stores. Sellis said that landlords and operators want to make sure a supermarket’s location has good sales, and not declining numbers.

The slowdown retail has experienced this year is a continuation of the marked decline in investor activity the sector experienced in the latter half of 2016, due to uncertainty surrounding major retailers and the presidential election. 

So far this year, interest rates have held steady and the chaos of the Trump administration has not adversely affected the real estate market. Sellis believes that owners and investors in a position to pull the trigger on deals could help strengthen transaction volume in the latter half of this year.