Northeast Real Estate Business

MAY 2018

Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.

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Page 35 of 44 Northeast Real Estate Business • May 2018 • 31 2018: THE LOOK AHEAD New legislation and a strengthened investment climate bring positivity to the retail sector. By Scott Holmes R etail real estate investments are well positioned to outperform for the remainder of 2018 as the tight labor market pushes wages up and a reduced tax burden for many individuals and corporations promote greater consumption and retail spend- ing. The Economy and Retail The economy is operating at near full employment, currently experi- encing the longest period of job cre- ation on record. In addition, the total number of available jobs remained in the low 6 million range, highlight- ing employers' unbridled demand for new talent. That said, job growth will moderate slightly this year, adding 1.8 million jobs, with the construction, professional services and hospitality sectors leading hiring. As unemploy- ment hovers just above 4 percent, up- ward pressure on wages continues to build. Strong potential of rising wages underlies an expectation that retail real estate will continue to perform positively. The new tax law also plays an im- portant role in real estate this year. In the immediate aftermath of the law's passage, many companies made sub- stantial commitments to investing in wages, hiring and infrastructure. The new tax rules should also reduce the uncertainty in a marketplace that gave investors pause and tempered transaction velocity in 2017. In addi- tion, the law's favorable treatment of pass-through entities and the preser- vation of like-kind exchanges for real estate assets should also encourage additional investment. The consensus that most individuals and corpora- tions will have a lower tax burden also benefits retail performance through greater spending. These promising economic metrics should boost discretionary income, which in turn may bolster core retail sales, a key economic driver that ex- cludes automobile and volatile gaso- line sales. Investors in this segment will also benefit from a diminishing construction pipeline. Demand Outpaces Deliveries Historically low completions and rising retail sales have buoyed space demand despite media concerns about e-commerce and its impact on big-box store closures. Retail develop- ment has trailed demand for much of the recovery, and this trend will con- tinue through 2018 as rising devel- opment costs work to reduce annual completions by roughly 10 percent, upon delivery of 54 million square feet of retail space. More than 30 percent of all retail construction this year will be focused in sev- en major markets, those being Boston, Dallas-Fort Worth, Houston, Miami, New York, Phoenix and San Francisco. M u l t i - t e n a n t shopping centers make up the bulk of deliveries this year with much of the construction be- ing small to mid- size centers. Single-tenant assets, which have accounted for two-thirds of deliveries since 2009, make up a lesser share of the new supply with projects being built-to-suit for strong credit tenants. For both retail types, construction lending will remain conservative, allowing absorption to outpace completions, leading to de- clining retail vacancy. Retail Real Estate Near Full Occupancy Healthy demand and climbing core retail sales drove nationwide vacan- cy down to 5.1 percent by the end of 2017, its lowest level in more than 18 years. These encouraging trends will continue this year as decreased con- struction activity triggers increased demand. As a result, national vacancy is expected to fall 10 basis points to 5 percent by year-end with San Francis- co and Boston claiming the lowest va- cancy out of major U.S. metros, both operating at sub-3 percent vacancy. As vacancy continues to fall, rents will act in accordance, increasing by 3.2 percent and pushing the measure to $19.97 per square foot. Another year of strong rent gains should support an active investment environment this year. Opportunity and Upside The uncertainty over tax policy, which was a key factor that kept many investors on the sidelines for much of 2017, was remedied with the pas- sage of the new tax law at year-end. Equipped with greater clarity, and in many cases benefitting from the new rules, investment activity should ac- celerate this year. Favorable treatment of pass-through entities may attract an influx of new capital while the preser- vation of the 1031 exchange combined with lower tax rates may also encour- age retail real estate owners to list properties this year. As the e-commerce sector continues to grow, investors are modifying their strategies and widening their search criteria for retail space with repurpos- ing potential. Some investors are re- positioning large spaces traditionally occupied by big-box retail anchors into spaces for smaller-format retail- ers and non-traditional users, such as service and entertainment oriented tenants. That said, investors are in- creasingly scrutinizing leases, specifi- cally those with a big-box retail brand, and assessing whether those retailers will reduce or shutter their spaces in the foreseeable future. In terms of specific markets, inves- tors should keep a close eye on Seat- tle-Tacoma, San Francisco and Boston, sitting in the top three of Marcus & Millichap's National Retail Index. In these metros, high-wage job growth, driven by new technology, are induc- ing strong net migration, resulting in additional retail demand. Yield-driv- en investors may seek opportunities in Midwest cities, as cap rates in these metros are generally higher than those in coastal markets. Overall, a confluence of factors will positively impact retail real estate throughout 2018. While challenges undoubtedly exist, this continuously evolving property type offers many opportunities for investors. Scott Holmes is senior vice president and national director – retail, for Marcus & Millichap and IPA, a division of Marcus & Millichap. Scott Holmes Marcus & Millichap and IPA Healthy demand and climbing core retail sales drove nationwide vacancy down to 5.1 percent by the end of 2017, its lowest level in more than 18 years. FLEXIBLE SPACE SOLUTIONS FOR YOUR BUSINESS Operating and managing 6 million square feet of industrial, commercial, and retail space in the mid-Atlantic region. Contact us today to learn more. (302) 323-9300 • 405 E. Marsh Lane, Suite 1, Newport, DE 19804 INDUSTRIAL OFFICE RETAIL

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