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Urban Land Institute: Number of the Week

According to Urban Land Institute:

“Occupancies at ‘A’-quality centers are at or near all-time highs, and market rents in such centers are increasing despite lackluster retail sales growth. A historic lack of new supply growth remains a key driver of retail fundamentals,” says Andrew McCulloch, managing director of real estate analytics for Green Street Advisors.

“Additionally, the healthiest retailers continue to seek out strong locations to establish brand recognition and awareness and are therefore migrating to the better centers. Because of their omni-channel strategies, retailers at ‘A’ centers are increasingly willing to pay rents not necessarily justified by sales out of the physical location.

“A sea change is occurring in consumer behavior, and e-commerce will continue to capture market share from physical retail,” says McCulloch. “E-commerce consumes about 20 percent of retail sales for malls and 10 percent for strip centers. The e-commerce drag on mall sales growth could be as much as 300 basis points annually in the coming years, which could essentially wipe out sale growth. Strip centers, on the other hand, are a little more protected as they have less exposure to threatened retail concepts and more tenants that are service providers,” he says. “You can’t buy a haircut online—not yet, at least.

“Better-quality retail outlets are adapting to the changing environment and should be fine, but lower-quality centers have been struggling and will continue to face increasing headwinds,” McCulloch says. “Operating fundamentals continue to bifurcate between the haves and have-nots.

“Tenant bankruptcies and closures of both individual stores and anchor stores have been a dominant concern for retail property owners, but for the best centers. the current levels are not overly problematic. Some landlords at better-quality retail outlets will even pay to get prime space back from a struggling tenant because oftentimes getting space back allows landlords to bring below-market rents to market.

“This divergence in property fundamentals between high-quality and low-quality centers is especially evident when looking at changes in asset values. For example, Green Street’s Commercial Property Price Index for high-productivity malls is about 50 percent above its prior peak, whereas values for low-productivity malls are not much different than their prior peak,” says McCulloch. “The operating environment for retail properties is far from uniform.”

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To view the full article from ULI, click here.