IRVINE, CA—From online retailing to consolidation in the grocery sector, retail has had more than its share of challenges, Auction.com’s chief economist Peter Muoio tells GlobeSt.com. Still, a recent report from the company shows that retail’s recovery is strengthening.
We asked Muoio how e-tailing and grocery-related shake-ups in particular are affecting the retail sector. “One theme we have spoken a lot about for retail in general is the myriad ways that the ongoing growth of e-retail is having an impact on bricks-and-mortar retail,” Muoio says. “Many investors have looked at grocery-anchored retail and taken the attitude, ‘People have to eat,’ and therefore, it is a much safer bet than other types of retail. However, grocery retail is also facing the pressure from online retail. I need to eat, but those groceries can be delivered by Peapod (tied into specific grocery chains in different regions), Amazon or even Google. Individual grocery chains have their own delivery options, making the actual location of the store begin to fade in importance. Retail is always subject to shake-ups. The pressures from online retail make those shake-ups more likely.”
Nevertheless, the sector continues to improve slowly, according to Auction.com’s report. Nationwide, retail vacancies have reached a new post-recession low at 10.1%—an improvement of 30 basis points from a year prior, but only 100 basis points below its post-recession peak in 2011. Absorption has outpaced supply in 14 of the past 15 quarters, averaging just over 3 million square feet per quarter in the past six quarters and slowly driving the vacancy rate down. While the trend is positive, we’ve yet to see absorption come close to its pre-recession numbers.
Likewise, the report says, supply additions have been scaled back since the recession. Since 2012, additions have averaged 1.9 million square feet, ranging from 1.2 million square feet to 2.9 million square feet per quarter. While the supply additions are modest compared to pre-recession numbers, the difference between completions and absorption has been too low to dramatically affect vacancy rates.
The percentage of sales attributed to e-retail continues to climb, reaching a record 11.6% in July—a gain of 120 basis points from one year prior, the report continues. While e-retail is helping drive absorption in distribution and fulfillment centers, it continues to be a drag on retail space and is contributing toward the trend of smaller store footprints, with less space needed for inventory. Retail space on a per-person basis reached a 10-year bottom at year-end 2014.
With the development pipeline remaining light, Auction.com expects national retail vacancies to descend from 10.4% at year-end 2014 to 8.4% in 2018. Completions should average 8.2 million square feet per year through 2019, compared with 28 million square feet per year from 1990 through 2009. However, the report states, “we expect completions to intensify through the forecast cycle, creeping above 10 million square feet by 2019. The vacancy rate will tread back up to 8.9% as the increase in deliveries runs headlong into a long-toothed economic cycle. This compares unfavorably with the 6% to 7% range that persisted through the late 1990s and 2000s.”