The Best Retail Locations Rent First
On today’s show I’m going to share a rather unscientific observation. It’s not based on a statistical sample size of any significance. But the data is first hand and for that reason, I’m paying attention to it.
A lot has been written about the pain of retail in the past year. There’s lots of office vacancy that has opened up as well. Many are wondering if the workplace of the future has been altered forever by the pandemic.
I’ve seen many retail vacancies almost everywhere I look. We’re talking the typical main street locations. Businesses that have held the same location for 40 years have closed.
However, I’ve had numerous conversations with commercial property owners in recent weeks.
My own commercial space is now fully leased, even if the monthly rate isn’t the highest. We have one tenant who is still struggling financially. But overall, the situation is manageable. The surprising part is that we are starting to get unsolicited interest from prospective tenants for commercial storefronts. This is after having extremely little interest for nearly a year.
Another commercial owner that I spoke with had four retail vacancies for much of the past year. Three out of the four spaces now have new leases signed.
That’s a remarkable change compared with only a few months ago.
Despite the economic pain, economies are looking past the pandemic. Let’s look at two completely different markets to see if there are some clues.
We’re going to compare Austin Texas and Las Vegas Nevada.
The biggest economic driver in Austin Texas is the tech industry. There is extensive growth in the tech sector from major tech employers including Amazon, Apple, Facebook, Tesla, Oracle and Qualcomm to name just a few. Come corporate relocations from California have accelerated the growth of the Austin market. These are high value jobs that have been resilient in during the pandemic.
In 2020, about 1.2M SF were added to the supply in the market. Vacancy increased from 4.2% to 4.9%. Much of the new growth was in outlying areas as the city continues to expand its boundaries in all directions. Asking rents continued to push upwards at $22.06 per SF, and increase of 0.5% compared with the previous year. Single tenant properties performed the best. Rents in the central business district fell as much as 20%. This area experienced the largest loss in business as workers stayed home during the pandemic.
Las Vegas on the other hand is heavily dependent on tourism and gaming. Both industries were decimated by the pandemic. Las Vegas has one of the highest rates of unemployment in the nation.
Retail vacancy increased from 7.2% to 7.6% over the past year. Most of that increase was the result of new product entering the market. Nearly 700,000 SF were added to the market in 2020 and an expected 702,000 SF or new retail is expected to hit the market in 2021, or about 0.7% growth of the total. Less than half of the new supply is expected to be absorbed this year.
So perhaps it’s no surprise that location matters more than anything else. In the case of retail, properties that are close to where people live performed the best. Those properties in new and expanding areas performed better than those linked to office workers. But you didn’t need a pandemic to know that downtown retail has performed poorly compared with the suburbs. That trend has been playing itself out for more than a decade.
There is no question that trends in retail are changing. Some retail space is functionally obsolete.
Anyone buying older retail sites has to consider one of two possible plays.
- Purchasing at such a low price that you can make money by renting at rates well below the rest of the market.
- Redeveloping the property to a higher and best use.