By Catherine Liu
With the rapid pace of technological advancement driving unprecedented changes in the commercial real estate landscape, no segment has seen its effects play out to the same degree as retail. Although recent media attention has focused heavily on negative retail narratives concerning big-box downsizing and the exit of long-established chains from the industry, opportunities exist for the rise of new players with unique product offerings to fill their space.
Up-and-coming retail brands, coupled with the trend toward more diverse tenant profiles, have contributed to stable property fundamentals and improving financial metrics across retail facilities in CMBS. This has been reflected by persistent underlying growth in reported net operating income (NOI) and occupancy rates since 2011, with NOI netting annual gains and average occupancy rates for major cities and property subtypes surpassing 90%.
Retail CMBS properties across emerging US markets have posted consistent year-over-year NOI growth in the years immediately preceding and following the recent financial crisis. Per Trepp data, overall retail NOI levels have been on an upward trajectory since 2011, albeit at a much slower pace. Average retail NOI growth decelerated from 2.19% in 2014, to 1.99% and 1.15% in 2016 and 2017, respectively.
Retail occupancy figures have steadily recouped to levels slightly less than their pre-recession prime, but they are showing signs of peaking. While average retail vacancy stats are still trending below the national average for all CRE property types, planned store closures in the pipeline, weakening demand, and high asking rents are expected to put further pressure on shopping center operators. Occupancy rates reported for individual retail properties remain elevated and exhibited year-over-year growth since 2011, with the exception of the 2016 fiscal year where it dipped 41 basis points. Financial statements for 2016 and 2017 show that average occupancy growth for retail CMBS reached 1.43% year over year while the national average tied to all property types declined by 1.54%. (One caveat to mention is that owners of distressed properties are more likely to cease reporting financials ahead of anticipated losses, so the numbers may not capture properties that are severely underwater.)
In terms of the industry’s performance among the top 20 largest metropolitan areas, the Miami-Fort Lauderdale, Florida; Houston, Texas; and Los Angeles-Long Beach, California MSAs headline NOI growth for retail properties behind securitized mortgages. CRE investment activity in these gateway cities has been strong due to their dense populations and stable growth potential.
Considering the segment’s diverse product offerings and broad range of square footage for each property, each retail sub-sector has processed the effects of shifting economic conditions and consumer preferences in different ways. Overall, urban/street retail, outlet centers, and superregional malls generated the most notable income acceleration after 2004. Since these properties feature a more balanced mix of national retailers and generally do not rely on department anchors to drive foot traffic, they have largely been able to escape the latest wave of store liquidations and bankruptcy proceedings affecting regional malls.
For all the breakdowns of which US regions, metros, and retail subtypes have posted the most financial growth since the financial crisis, download our full analysis.
Compliments of Trepp, a member of the EACCNY