Retail
United States | Retail Outlook | Q4 2016
Major markets
approach cyclical high
JLL Research
Retail Outlook | United States | Q4 2016
Contents
Retail property demand & supply approach equilibrium
3
What will 2017 bring?
7
Mall performance remains healthy for strong markets
9
Major big-box players are still performing well
11
Mom-and-pop stores see a renaissance thanks to home values
13
Retail Outlook | United States | Q4 2016
3
Retail property demand & supply approach
equilibrium
Total U.S.
Total s.f.
Total
Vacancy
YTD Net
Absorption
Q4 2016
Avg rent
QOQ%
Chg
YOY%
Chg*
5,247,360,203
3.0%
59,097,564
$18.45
1.6%
6.6%
Malls
893,667,566
5.1%
4,032,280
$19.82
2.3%
4.4%
Power Centers
747,501,947
4.9%
(222,685)
$18.53
0.8%
5.4%
Shopping Centers
3,512,930,222
8.0%
41,611,101
$15.16
0.7%
2.2%
Specialty Centers
83,921,215
5.4%
1,220,409
$16.78
-3.9%
-4.8%
10,485,381,153
5.1%
105,738,669
$16.54
1.1%
4.1%
Type
General Retail
Total Retail
Retail subtype
General Retail
Malls
Power Centers
Shopping Centers
Specialty Centers
Total Retail
Definition
Examples
Consists of single-tenant freestanding general-purpose
commercial buildings with parking
Includes Lifestyle Centers, Regional Malls and Super
Regional Malls
Consists of several freestanding anchors with minimal
small tenants, 250,000–600,000 s.f.
Includes Community Centers, Neighborhood Centers
and Strip Centers
Consists of the combined retail center types of Airport
Retail, Outlet Center and Theme/Festival Center
All retail building types in both single-tenant and multitenant buildings, including owner-occupied buildings
Drugstores, some groceries, streetfront urban
retail stores
Primarily anchored by mass merchants, fashion
and department stores
Primarily anchored by big-box tenants and
discount supercenters
Primarily anchored by groceries and local
services
Primarily anchored by manufacturers’ and
retailers’ outlets
All retail
Dallas, New York City, Miami, Houston, San Francisco
Boston
Hawaii, Washington, D.C.
Los Angeles
Orange County, Seattle, Tampa, United States
Atlanta, Orlando, Philadelphia
Peaking
market
Falling
market
Rising
market
Bottoming
market
San Diego, Chicago
Reading the clock
The JLL retail property clock demonstrates where each market sits within its real estate cycle. Markets generally move
clockwise around the clock, with markets on the left side of the clock generally landlord-favorable and markets on the
right side generally tenant-favorable. All of the markets have now moved to landlord-favorable, as rents gradually head
upward and vacancy continues to contract. Most of the major metros including Dallas, Boston, San Francisco, Miami, New
York and Houston have moved to a peaking market as demand grows ahead of new supply additions. Once demand and
supply reach equilibrium, the clock should strike midnight for most markets.
Retail Outlook | United States | Q4 2016
4
A slowdown in growth is expected, however, as retailer
comparable store sales increases are tapering off. Given
the correlation between same-store sales growth and
retailer openings, this slowdown may indicate weaker
absorption in coming quarters. Rents too are approaching
their peak in many of the strongest markets like New York,
San Francisco, Houston, Dallas, Miami and Boston. The
markets that should see outsized growth in coming
quarters are some of the housing-bust markets that are
now approaching their zenith, like Tampa and Orlando.
Demand continues to outpace supply
200.0
Net absorption s.f.
Deliveries s.f.
in millions of square feet
180.0
160.0
140.0
120.0
100.0
80.0
Net absorption by retail subtype—Q4 2016
General Retail
Power Centers
Specialty Centers
40.0
20.0
Source: CoStar, JLL
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
0.0
Malls
Shopping Centers
1.5
1.0
0.5
0.0
-0.5
Source: CoStar, JLL
60.0
-20.0
Despite the recent woes of the oil industry, Houston has,
heretofore, performed like a champion with very strong
fundamentals: high net absorption, decreasing vacancies
and construction comfortably below the market’s strong
population growth. As a result, rents grew 5 percent
between 2014 and 2015. However, as construction ramps
up, any softening in demand could lead to decreasing rent
gains and a bump up in vacancy.
Houston
Chicago
Dallas
Atlanta
New York Metro
Washington DC
Philadelphia
Tampa
Los Angeles
Seattle
San Diego
Boston
Orlando
San Francisco
Hawaii
Miami
Orange County
Cautious construction activity resulted in only 16.5 million
square feet delivered during the quarter, which helped
push down vacancies a further 20 basis points from the
previous quarter. Annual retail deliveries in 2016 totaled
67.3 million square feet—more than 57 percent below net
absorption during the same period, causing vacancies to
compress 50 basis points year-over-year.
Houston proves to be an MVP in the fourth quarter
Absorption in millions of square feet
Retail recovery heading into 2017 continues to plod on
gradually. Fourth-quarter vacancy of 5.0 percent sits 100
basis points below its level 10 years ago, at the height of
market performance. Net absorption for the quarter is
holding momentum, at 21.2 million square feet—an 18.9
percent increase from the fourth quarter in 2015. For all of
2016, net absorption totaled 105.7 million square feet—a
14.6 percent increase over 2015.
Retail Outlook | United States | Q4 2016
5
Vacancy rates continue to head downward
Construction remains muted for now
In all of the United States, vacancy for shopping centers
saw the greatest decline of 68 basis points, year over year.
Developers remain cautious when adding new space. Total
retail deliveries in 2016 were 67.3 million square feet—
almost 10 percent below their 2015 level. Construction
levels are also somewhat muted from numbers a year ago,
with 68.4 million square feet currently under construction—
a 9.1 percent decline.
Mall vacancy inched up five basis points, year over year, as
deliveries have exceeded absorption over the last four
quarters, with a surplus of over 682,000 square feet.
General/freestanding retail vacancy compressed by 65
basis points. Due to negative net absorption in the second
and third quarters, power centers saw vacancies rise 47
basis points from the same period in 2015.
YOY vacancy compression by retail subtype
General Retail
Mall
Power Centers
Shopping Center
Dallas and New York lead the markets in construction
activity, particularly in freestanding/general retail. While
the majority of retail space being built largely consists of
freestanding retail (55 percent), much of which will take the
form of urban or high-end mixed use centers, the greatest
increase in construction has taken place among power
centers, which had 4.8 million square feet under
construction at the end of 2016—a 31.3 percent increase
over end-of-2015 activity
Change in space being constructed by retail subtype
2015—2016 chg
In bps
100.0
31.3%
47
50.0
4.1%
5
0.0
27.0%
12.7%
0.0%
-9
-50.0
-100.0
-65
-68
Total U.S.
Source: CoStar, JLL
-25.1%
General
Retail
Malls
Source: CoStar, JLL
Power Shopping Specialty
Centers Centers Centers
Total
Retail
Retail Outlook | United States | Q4 2016
6
S.f. under construction by retail subtype—
as of Q4 2016
Space under construction by retail subtype—Q4 2016
General Retail
Power Centers
Specialty Centers
Malls
Shopping Centers
Shopping
Centers
19%
Orlando
Specialty
Centers
2%
Hawaii
San Francisco
Power
Centers
7%
Orange County
Seattle
S.f. under
construction
San Diego
Tampa
Malls
17%
Chicago
Washington DC
Los Angeles
Miami
Source: CoStar, JLL
Boston
Philadelphia
Houston
Atlanta
New York Metro
Dallas
0
1
2
3
4
5
6
Construction in millions of square feet
Source: CoStar, JLL
General
Retail
55%
Retail Outlook | United States | Q4 2016
7
What will 2017 bring?
Demand still trumps closures
Retailer
# of closures
announced
The Limited
250
Walgreens
200*
The Children’s
Place
200*
With retailers like Macy’s, Sears, The Limited, Finish Line and Wet Seal
announcing big closures for this year, a significant amount of retail space will be
impacted. Total store closure GLA announced in 2016 was 97.8 million square
feet, compared to 41.4 million in 2015—a 136 percent increase.
Despite the anticipated blow to occupancy, particularly in malls, net absorption
in 2016 (at 105.7 million square feet) still tracked higher than announced
closings (97.8 million square feet). The greatest impact of the newly vacated
space is expected to be already-struggling malls, which will find it difficult to
replace key anchor tenants like Macy’s.
The total square feet being vacated is the highest since 2008 (millions s.f.)
Announced store closings—GAFO (GLA)
American Eagle
150*
Finish Line
150*
Wet Seal
165.5
132.2
103.3
88.9
171
97.8
88.4
57.8
58.9 55.3
71.2
68.7
62.0
56.0
33.5
Aeropostale
24.5
41.4
113
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Chico’s
120*
Macy’s
100
CVS
Sears/Kmart
Source: Clark.com, Business Insider
*Multiyear
Source: ICSC, JLL
Net absorption in 2016 was higher than announced store closure GLA
70
30
Announced
closures
(GAFO)
Net
Absorption
105.7
Source: ICSC, CoStar, JLL
2016 GLA
(million of s.f.)
97.8
Retail Outlook | United States | Q4 2016
8
Due to the cyclical nature of retail, store closures are a
regular part of business. Retailers routinely divest
themselves of underperforming locations to focus on what
is working and shift strategies to cater to consumers’
changing needs. As omnichannel retail becomes
increasingly prevalent, the function of stores will continue
to be redefined. Rather than being limited to transactional
locations, stores are increasingly serving in a greater
capacity as cross-channel fulfillment centers, pick-up
stations for online orders, convenient locations for returns,
product showrooms and vehicles to boost branding and
create buzz. This is clearly illustrated in the number of
online retailers opening up physical space, not just to
transact sales but to interact with their customers in ways
that cannot be replicated online.
As such, the store experience has never been more critical.
While e-commerce continues to grow, thanks to
convenience, price and selection, shoppers still love going
to stores. According to surveys conducted by DMI in 2015
and 2016, findings imply that consumers have become
more complacent with online shopping, with online
shopping satisfaction dropping 5 percent, year-over-year,
and frequency dipping 4 percent. Meanwhile, in-store
shopping frequency among respondents remained
unchanged while satisfaction ratings grew 7 percent. As
retailers focus more on the shopping experience, store
satisfaction should remain strong.
As the function of the retail store changes, it is inevitable
that underperforming stores will close (particularly in weak
or defunct locations), and retailers will open smaller stores
in urban markets to remain flexible in responding to
shifting consumer demographics and behavior.
Furthermore, as consumers look for more novelty and
personalization in their shopping experience, we can
anticipate the decrease in focus on chain stores and a
growth in the “maker movement,” or smaller, craft-focused,
curated, boutique-type stores, as well as innovative
flagship locations that build brand attachment (read our
Flagship report for more details).
Outlook for 2017
Retail sales showed strong year-over-year growth of 4.1
percent in December, boosted by the rise in gas prices. On
a positive note, increases were strong across many
categories, especially health and personal care,
automobiles, and furniture and home stores. Prospects for
continued healthy performance are good, given that
conditions remain what they are: wages are increasing,
albeit at a slower rate, saving is healthy and access to
credit is improving. The greatest risk to retail sales
performance is the uncertainty about economic policy as
well as future gas price trajectory.
Retail sales growth strong at the end of 2016
Retail sales chg % YOY
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
Jan 2000
Jan 2001
Jan 2002
Jan 2003
Jan 2004
Jan 2005
Jan 2006
Jan 2007
Jan 2008
Jan 2009
Jan 2010
Jan 2011
Jan 2012
Jan 2013
Jan 2014
Jan 2015
Jan 2016
Shop, be nimble
Source: Economy.com
Retail Outlook | United States | Q4 2016
9
Mall performance remains healthy for strong markets
Mall Property Clock
For malls, most of the major
markets have now moved to
landlord-favorable. New York,
Hawaii, San Francisco, San Diego,
Los Angeles and Miami are seeing
low vacancies and are therefore
peaking. Conversely, Chicago and
Philadelphia are bottoming
markets, which have yet to see
meaningful vacancy compression
or rent gains.
San Francisco, Los Angeles,
San Diego
Boston, Orange County
Miami, Hawaii, New
York Metro, Seattle
Peaking
market
Washington, DC, Dallas,
Houston, Orlando
Atlanta, United States
Tampa
Falling
market
Rising Bottoming
market
market
Philadelphia,
Chicago
Retail Outlook | United States | Q4 2016
10
A tale of two malls
The chasm between strong and weak
malls will continue to play out in 2017.
With Macy’s and Sears vacating about
18 million square feet of space
between them this year, many malls
will be under pressure to find new
anchors. For malls in strong locations,
these vacancies may actually be a
boon, allowing them to trade up to a
more productive anchor (like
Nordstrom or Saks) or shift to a strong
non-traditional anchor, like Bass Pro
Shops. However, weak malls will likely
struggle to replace these tenants,
resulting in a domino effect of
decreasing performance and
increasing vacancy.
Metros with low retail per capita like
New York and Miami are seeing both
strong mall absorption and
construction. Deliveries and current
development projects are taking the
form of mixed-use developments in
urban locations, thereby capitalizing
on strong demographics and underserved demand.
Q4 2016 Mall construction (s.f.)
Orlando
0
Seattle
0
Los Angeles
0
Houston
0
Tampa
9,500
Chicago
15,270
Hawaii
Orange County
San Francisco
San Diego
Washington DC
Philadelphia
Dallas
Boston
Atlanta
New York Metro
Miami
Source: CoStar, JLL
57,750
170,000
250,000
399,500
416,400
455,003
600,000
633,850
828,168
1,000,000
1,178,751
Retail Outlook | United States | Q4 2016
11
Major big-box players are still performing well
Power Center Property Clock
San Francisco, Dallas,
New York Metro
Washington, DC, Tampa
Orange County, Miami,
Philadelphia, Houston, Boston,
Orlando, United States
Hawaii, Seattle
Peaking
market
Falling
market
Rising Bottoming
market
market
Atlanta, San Diego
Los Angeles
Chicago
As power centers have seen strong
improvement over the last two
years, most metros are either in
the peaking or rising market
quadrants.
Retail Outlook | United States | Q4 2016
12
6%
5%
4%
3%
$700.00
3%
2%
1%
$600.00
4%
4%
1%
2%
2%
$769
$800.00
0%
1%
$500.00
$200.00
$100.00
$292
$280
$300.00
$384
$383
$371
-3%
-4%
$307
$400.00
$436
-2%
-6%
$257
Houston was at the head of the pack
for power center absorption during
2016. Over the past four quarters,
Houston power center net absorption
totaled over 1.0 million square feet.
However, new power center deliveries
topped 1.2 million for the year, which
pushed up vacancies. Should
construction remain high, Houston will
show a marked softening in
fundamentals for this property type.
Sales chg YOY
$900.00
$228
For the most part, big-box retailer
sales have been solid. While Staples
and hhgregg show a decrease in yearover-year sales p.s.f. (of -3 percent and
-8 percent, respectively), retailers such
as Home Depot, Lowe’s, Walmart,
Target and Ross have seen gains of 3
percent or higher in the last year.
Sales p.s.f.
$160
Despite recent negative absorption,
U.S. power center vacancies stand at
4.9 percent, 10 basis points lower than
they were in 2007, and 280 basis
points lower than they were at their
peak in 2009.
Many big-box stores showing sales growth in the last year
$150
Big boxes still seeing sales growth
-8%
$0.00
Source: Credintell, Retail LeaseTrac, JLL
-8%
-10%
Retail Outlook | United States | Q4 2016
13
Mom-and-pop stores see a renaissance thanks to
home values
Community, Neighborhood & Strip Center Property Clock
For shopping centers, the markets on
the clock are somewhat closely
clustered in the rising segment, as
significant improvement has only
begun to manifest in recent
quarters. As conditions continue to
improve, more markets should
gradually move past nine o’clock
toward midnight.
Hawaii
Dallas, San Francisco
San Francisco, New York Metro, Miami
Houston, Boston, Washington, DC
Miami, Orange County, Hawaii, Seattle,
Los Angeles, San Diego, United States
Atlanta, Orlando, Tampa
Philadelphia
Chicago
Peaking
market
Falling
market
Rising Bottoming
market
market
Retail Outlook | United States | Q4 2016
14
Good things are coming in small packages
Mom-and-pop stores, which typically fill in-line space in
neighborhood and strip centers, are making a comeback.
Shopping center demand on a whole grew 26 percent in
2016. Thanks to rising home prices, many of these tenants
now have access to capital raised against their personal
assets. As a result, demand for small retail should see an
upward trajectory in coming quarters. Home prices are
expected to continue growing over the next several years.
Growth in home prices will benefit mom-and-pop
retailers
$400.00
Existing home prices ($000)
$350.00
New home prices ($000)
$300.00
$250.00
$200.00
Shopping center demand grew 26 percent in 2016
$150.00
2018Q1
2020Q1
2018Q1
2020Q1
2016Q1
2014Q1
2012Q1
2010Q1
2008Q1
2006Q1
2004Q1
2002Q1
$100.00
2000Q1
Shopping center net absorption
(in millions of square feet)
Source: Economy.com, JLL
59
46
33
17
17
25
28
33
42
Home prices are expected to continue growing
Existing home price chg YOY
16.0%
-14
12.0%
8.0%
4.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0.0%
-4.0%
-8.0%
-12.0%
Sourc: eEconomy.com, JLL
2016Q1
2014Q1
2012Q1
2010Q1
2008Q1
2006Q1
2004Q1
2002Q1
-16.0%
2000Q1
Source: CoStar, JLL
Retail Outlook | United States | Q4 2016
15
Want more information?
Greg Maloney
President & CEO
Retail Americas
+1 404 995 6315
[email protected]
James Cook
Americas Director of Research, Retail
+1 317 810 7191
[email protected]
Keisha Virtue
Senior Research Analyst
Retail Americas
+1 954 990 0844
[email protected]
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