Issues of Declining Occupancy, Rising Rent Spread to Top Properties

Even the best-performing and most well-located U.S. malls and shopping centers are beginning to feel the pinch of flat-lining rent growth and a vacancy uptick as e-commerce continues to take market share from brick-and-mortar retailers, and the retail sector enters the late stages of the real estate cycle.

Despite a relatively strong finish for retailers in the final three months of 2017, buoyed by improved consumer spending and an expanding economy, demand for U.S. retail property in the commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – was generally lackluster for the year, according to market highlights presented by CoStar managing consultant Ryan McCullough and director of U.S. research Suzanne Mulvee in the Fourth Quarter 2017 State of the U.S. Retail Market.

This CoStar report on national and Philadelphia commercial properties is being offered through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

“All told, we are seeing some signs of a slowdown in the retail market,” said McCullough, noting that retail absorption totaled about 69 million square feet for 2017, down about 30 percent from 2016 and 2015 levels, with developers expecting to deliver roughly 80 million square feet of new retail space in 2018 as demand from retail tenants begins to soften. “Given the slowdown in demand and some uptick in supply, we might anticipate the national retail vacancy rate, which went flat in 2017, to start to rise modestly in 2018,” McCullough said.

Reflecting the slow investment sales volume observed by CoStar analysts across all commercial property types, retail investment involving U.S. and Philadelphia commercial real estate properties fell to just below $20 billion in the fourth quarter, its lowest level since mid-2014. In addition to a diminished appetite among cautious buyers, many sellers also are pulling properties off the market after failing to achieve pricing that meets their expectations, McCullough said.

One sign of the softening market conditions is a moderate rise in vacancies and flat-lining of rental rate growth in recent quarters at the country’s top located and most productive Class A malls, urban luxury centers and shopping centers. Nationwide, U.S. and Philadelphia commercial real estate properties have consistently logged the highest location quality scores, as ranked by CoStar’s proprietary formula measuring the combined effects of demographics, density of surrounding commercial property and market competition on individual retail centers.

While retailers are readily absorbing some new supply that’s flowing into the national and Philadelphia commercial real estate listings market – especially spaces of 20,000 square feet and below – larger boxes in certain centers ranked in the top 10th percentiles of location quality are in many cases taking longer to lease up, reflecting broader weakness among U.S. power center tenants.

Meanwhile, at the opposite end of the quality spectrum, the number of “zombie” power centers with vacancy rates of 40 percent or more has increased 60 percent since 2016 due to a spike in store closures by Kmart, Toys R Us and other big-box retailers and grocers.

The closures and bankruptcy filings being seen in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – are mounting weekly and likely will not abate any time soon. Toys R Us plans to close another 200 stores and lay off corporate personnel, in addition to the 170 previously announced store closures The Wall Street Journal reported recently. Also, Northeast supermarket chain Tops Markets LLC reports it has filed for Chapter 11 bankruptcy protection.

While total retail space per capita has decreased by about 5 percent since 2009, the amount of anchored space per capita among U.S. and Philadelphia commercial real estate listings increased by the same amount during that period amid competition from big-box chains that have added food and groceries to compete with grocery chains.

For more information about Philly office space, Philly retail space and Philly industrial space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a leading Philadelphia commercial real estate broker that specializes in Philly office space, Philly retail space and Philly industrial space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

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