2016 Retail Market Outlook

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This Market Outlook was provided by SVN International Corp. bringing you the latest industry trends, economic outlooks and markets to watch as we head into the second half of 2016.

The retail real estate market continues to face some of the most difficult challenges as the basic business model of many retailers changes from physical storefront to online sales with direct to consumer delivery. Simultaneously, the broad macro economic recovery has created more employed consumers with large disposable incomes available to spend at retail merchants than ever in history. This dichotomy will make certain retail properties excel while rendering others nearly obsolete in 2016 and beyond.

Investment sales of retail real estate scored another record year in 2015 with $89.4 billion in transactions, up just 3% over 2014 which held the prior volume record. Cap rates averaged 6.5% according to Real Capital Analytics; however, the results vary substantially by sub-category.  Unanchored retail was up 27% year over year while anchored was down –10% and, perhaps more interestingly, unanchored traded at an average cap rate of 7.0% versus 7.1%  for anchored, implying that having an anchor was actually an increasing risk factor. Major gainers in sales volume include urban/storefront (22% YoY gain with an average 5.0% cap rate), single tenant (19% YoY gain with an average 6.1% cap rate), and grocery (7% YoY gain with an average 6.9% cap rate). Major losers in sales volume included lifestyle/power center (-34% YoY loss with an average 6.9% cap rate), big box (-13% YoY loss with an average 6.7% cap rate), and drug store (-8% YoY loss with an average 5.8% cap rate). Malls actually increased in sales volume by 23% with an average cap rate of 6.4%, however their volume is still significantly reduced from peak levels.

Sales trends indicate that investors are following the trends of urbanization as urban/storefront was the major winner with a trend that started after the recession; further, they traded at a cap rate nearly 100 basis points lower than other competitive retail investments. This will no doubt be a hot sector in 2016 and for years to come.

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