A recent report by CoStar indicates that quoted asking rents have increased across all retail property types in the U.S. for the first time in five years. During the first quarter of this year, 70% of U.S. retail markets had positive rent growth, indicating a turnaround for a market segment that has been slow to recover for many years. Growth in retail demand was strongest in western markets like Dallas, Denver, Phoenix, and San Diego.
Challenges remain for retail real estate, however. Although rent growth was positive, it was nevertheless slow and is unlikely to increase substantially anytime soon. Net retail absorption nationwide in the first quarter was 17 million s.f., down from from the year before. Many retailers have continued to shed stores and consolidate to the strongest locations. Demand for power centers is especially threatened as “category killer” retailers like Best Buy and Staples face increasing competition by Amazon and other online retail. In fact, Susan Mulvee of Property & Portfolio Research predicted that within many power centers will go dark within 10 years.
On the investment side, the single-tenant net lease market in retail properties with national credit tenants is going strong. Brain Capo of Marcus & Millichap’s Orlando office indicated that triple-net deals are not lasting long on the market. Capitalization rates have compressed by 50 basis points in the last two months, with numbers approaching the pre-recession boom.