Video may have killed the radio star, but has e-commerce done the same to your local retail establishment? Will the rise of everything from Amazon to Zappos take down the bookstore up the street, your local shoe store? Don’t bet on it.
While the much-touted demise of good old fashioned, bricks-and-mortar stores makes for good headlines, it’s not actually based in fact.
According to JLL’s Cross Sector Outlook released this spring, despite e-commerce’s leaps and bounds over the last few years, it still represents a relatively small percentage of total retail sales—6.0% to be exact. Your shoe store is safe for now, and probably well into the future.
“Remember catalogs? Flipping through the pages, dialing up a call center and placing an order? Web sales are really just replacing that,” said Kris Cooper, Managing Director, JLL Capital Markets. “People still need to see and touch things; the instant gratification of an in-store purchase can’t be discounted. Retailers who want to thrive will need to incorporate it all—hands-on goods, e-commerce and mobile-commerce.”
Despite these emerging structural challenges and newly-announced store closings, such as those of Radio Shack, Office Depot, and Coldwater Creek, the U.S. retail sector has continued on its solid recovery and is exhibiting tightening market conditions.
Cap rates compressed by approximately 20 basis points in 2013 as rent growth is expected to increase to 2.7% in 2014. Vacancy rates are also expected to compress another 20 basis points by the end of this year.
Right now, power centers, in particular, are punching above their weight class, experiencing the tightest overall market conditions with a total vacancy rate of just 5.1%.
A FEEDING FRENZY
What does this mean for the health of the retail investment sales and financing market? Investors have wasted no time hopping back on the retail bandwagon, particularly in core markets where new product often produces a “feeding frenzy.”
In February, Savanna purchased 10 Madison Square West in New York for more than $2,900 per square foot ($60 million). Price appreciation for retail product was outstanding in 2013; the Moody’s/RCA CPPI for retail is expected to post a 23% increase for the year—and reach similar numbers by the end of 2014.
“Right now, it’s all about high-quality, grocery-anchored centers and trophy malls," said Margaret Caldwell, Managing Director, JLL’s Capital Markets. "Demand for those asset types is incredible right now—if only we could convince all the owners to bring those to market. Investment in the gateway cities is strong, as always—but watch for a few dark horses to emerge in the coming months. Markets like Phoenix and Indianapolis could make some real headway by the end of the year.”
In the financing arena, debt is plentiful as balance sheet lenders such as life insurance companies are increasing their allocations in 2014 and remain competitive, while domestic banks continue to report stronger demand for commercial property loans. CMBS money is also plentiful, with retail collateralizing 20 percent of all CMBS deals in the first quarter of 2014.
“Watch for equity to make some significant strides in the retail space in the coming year, as well,” said Mark Brandenburg, Executive Vice President, JLL’s Capital Markets. “For a long time, equity sponsors were holding back, waiting to see if retail would survive the e-commerce invasion. Now that things have settled down a bit, many of those JV equity players are under allocated in the retail space and they’ll need to make some big plays to balance things out.”
Brandenburg also advises investors to keep their eyes on secondary markets as the borrowing rates for primary versus secondary markets don’t vary much.
“Leveraged yields into secondary and tertiary markets will be higher for the same quality real estate due to positive leverage between borrowing rates and cap rates,” he concluded.
About JLL's Retail Group
JLL’s Retail Group serves as the industry’s leader in retail real estate services. The firm’s more than 850 dedicated retail experts in the Americas partner with investors and occupiers around the globe to support and shape investment and site selection strategies.
Its retail specialists provide independent and expert advice to clients, backed by industry-leading research that delivers maximum value throughout the entire lifecycle of an asset or lease. The firm has more than 80 retail brokerage experts spanning 20 major markets, representing more than 100 retail clients. As the largest third party retail property manager in the United States, JLL’s retail portfolio has 305 centers, totaling 65.7 million square feet under management in regional malls, lifestyle centers, grocery-anchored centers, power centers, central business districts, transportation facilities and mixed-use projects.
For more, visit www.jllretail.com.
Related Stories
| Nov 26, 2014
U.S. Steel decides to stay in Pittsburgh, plans new HQ near Penguins arena
The giant steelmaker has agreed to move into a new headquarters that is slated to be part of a major redevelopment.
Sponsored | | Nov 26, 2014
It’s time to start trusting your employees more
A recent study published in the journal Psychological Science revealed that employees were 26% more satisfied in their roles when they had positions of power. SPONSORED CONTENT
Sponsored | | Nov 26, 2014
What’s in a coating?
A beautiful coating on metal products can make a strong statement, whether used on a high-end commercial project or an industrial building. SPONSORED CONTENT
Sponsored | | Nov 26, 2014
Virtual reality in 3D models, iPhone thermal imaging: Inside one very cool tech toybox
A little over a year ago, I embarked on a search to find individuals in the AEC space who were putting new hardware to work in the field.
| Nov 25, 2014
Behnisch Architekten unveils design for energy-positive building in Boston
The multi-use building for Artists For Humanity that is slated to be the largest energy positive commercial building in New England.
| Nov 25, 2014
Study: 85% of employees dissatisfied with their office environment
A vast majority of office workers feel open floor plans cause multiple distractions and that more private spaces are needed in today's offices, according to a new study by Steelcase and research firm IPSOS.
| Nov 25, 2014
Emerging design and operation strategies for the ambulatory team in transition
As healthcare systems shift their care models to be more responsive to patient-centered care, ambulatory care teams need to be positioned to operate efficiently in their everyday work environments, write CannonDesign Health Practice leaders Tonia Burnette and Mike Pukszta.
| Nov 24, 2014
Midsize construction firms see a brighter business horizon
Uncertainty about government spending clouds an otherwise positive economic outlook among 59 middle market construction firms polled recently by GE Capital.
| Nov 24, 2014
Adrian Smith + Gordon Gill-designed crystalline tower breaks ground in southwestern China
Fitted with an LED façade, the 468-meter Greenland Tower Chengdu will act as a light sculpture for the city of Chengdu.
| Nov 21, 2014
Rental apartment construction soars to 27-year high: WSJ report
The multifamily sector is now outpacing the peak construction rate in the previous housing cycle, in 2006, according to the WSJ.