The 2015 school year is wrapping up and JLL is grading the growth trajectory of the top 16 U.S. retail
real estate markets. More than half of the cities scored an “A” grade, indicating an expected four to five percent increase in growth through 2017. Phoenix in particular is taking its namesake to heart, rising to claim the best overall grade, according to JLL’s Retail Market Grade report, launched today at the International Conference of Shopping Centers (ICSC) conference in Las Vegas.
“The U.S. is experiencing rising rents and compressing vacancies in most major markets, but the strongest growth won’t necessarily be where there are supply constraints. Population and employment growth will be the most substantial markers for future potential,” said Naveen Jaggi, President of Americas Retail Brokerage for JLL. “What’s striking about urbanization today is the sheer scope and pace at which people are flocking to cities, with an estimated 60 million people moving into metropolitan areas each year. So as the saying goes, retail will continue to follow rooftops and open wallets.”
JLL’s report scores each market based on its anticipated growth rates, which hinges on five forecasted areas: employment, population, household income, retail net absorption and average retail rent. Each market’s distinction is weighed against the U.S. national average, and categorized into either “A” cities, which show potential for four to five percent growth, “B” markets, which are likely to see two to four percent growth, or “C” areas, which will remain flat with less than two percent growth.
Star Pupils: A Markets:
- A+ | Phoenix: Phoenix is emerging from the ashes of the recession as a primary target market for up-and-coming retailers looking to expand and/or roll out new concepts. This red-hot market is fueled by a number of factors: the resurgence of the residential market and an influx of quality employers created by a blossoming tech scene. Economists are expected to stay high on Phoenix as continued robust job and population growth drive down vacancies and raise rents.
“Phoenix’s retail market has recorded three straight years of positive net absorption greater than 1.5 million square feet and vacancy rates in the city have finally dropped below 10 percent for the first time since 2008,” said Tyson Switzenberg, Senior Vice President and Phoenix Retail Brokerage Lead for JLL. “The market should see steady growth and redevelopment, with several retail centers that are past their prime being repurposed or razed for different uses. There’s also an uptick in QSR restaurants competing for class A space and furniture, entertainment and discount retailers eating up second generation big box space.”
- A | Dallas: Limited development has boosted the recovery of the Dallas retail sector, but by mid-2016 new construction will push vacancy rates up slightly, drawing in new retailers to the metroplex. As one of the fastest growing job markets in the U.S., consumer spending has increased in the city, reassuring retailers’ expansion plans.
- A | Denver: A highly-educated, high-income population will drive the retail sector’s continued growth in Denver. Its economic fundamentals are strong – higher than the national average – and its high rent growth and moderate construction are anticipated to keep the retail real estate market in check.
- A | Seattle: Its biggest strength lies in its burgeoning population, which is characterized by high income and job gains, and prime spending age demographics.
- A | Orlando: Fundamentals are growing, although forecasted household income growth is slightly below the national average. Expansion in this market will be solid in coming years, thanks to strong employment growth and a young, vibrant, well-educated population.
- A | San Francisco: As one of the tightest markets in the nation, San Francisco’s retail fundamentals are strong, but supply is restricted. In the last 10 years, the market has become a fertile breeding ground for retail brands but those expanding need to be disciplined and have a very strategic outlook.
- A – | Los Angeles:A. is a fundamentally stable market with consistent appeal for investors and retailers alike, thanks to pockets of very high income, population density and liquidity.
- A – | Miami: The market has fully recovered, with rents surpassing their prerecession peak. Developers have been aggressive as new construction of mixed-use and urban retail boom, especially along the Brickell Corridor. Growth will be moderate going forward, but that’s because Miami is well ahead of the competition.
- A – | New York: Its recovery will remain steady for the next few years, and it will not lose its near-universal appeal. The Big Apple will continue to be one of the tightest markets in the U.S., with vacancy among the 10 lowest in the country.
- B | Boston: Recovery is well underway but economic growth is trudging along slowly. While the best assets have considerably high prices per square foot, disruptions to the grocery segment make investment of grocery-anchored centers risky.
- B | Houston: The oil and gas hot spot is still one of the best performing markets in the country. While the construction pipeline is by no means empty, it only represents about 0.7 percent of total inventory, and about 87 percent of that is pre-leased, which should keep down vacancies.
- B | Washington, D.C.: The city’s fundamentals are healthy, and supply and demand are evenly matched. The market should perform in line with the national average.
- B – | Atlanta: Atlanta has an improving local economy, but relatively weak retail fundamentals so far. While rents are expected to show strong growth, vacancies will remain elevated for the next few years.
- B – | Chicago: The Windy City may not experience the same high water mark during robust economic periods as some of the coastal, gateway cities as it tends to be less volatile and more stable. Retail sales are at a record high, and last year Chicago realized a new milestone—more than 50 million tourists/visitors, four million more than New York, generating almost $14B in direct spending.
- B – | Philadelphia: Retail fundamentals are tracking lower than the national average in this city, but rent growth is expected to be strong. The popularity of Center City with retailers, workers, residents and tourists should push up investor returns.
- C | St. Louis: A weak market overall, has stalled this city’s economic growth and retail fundamentals are consistently under the average.