CHICAGO– Retail’s journey from underdog to favored asset class continued in the second quarter of 2022, according to a report by JLL.
Rising occupancy rates, population growth and low delivery of new products, combined with high construction costs, are all driving market rent growth for retail, making the area even more attractive to investors. Several markets show they have the most momentum for rental growth, with four emerging markets identified as having the most potential.
The top eight markets with high population growth also lead in rent growth.
With nearly 63% growth in rental rates since 2011, Nashville is the fastest growing market, followed by South Florida at 47.1% and Austin and Tampa at 39%. The other top markets for rent growth are Denver at 37% and Charlotte, Dallas-Fort Worth and Raleigh-Durham with rent growth around 30%. These buoyant markets have experienced rental growth since 2011 above the national 10-year rental growth of 27.7%, as well as population growth above the national 10-year average of 7.4%.
“Retail follows consumers, rent growth follows both and investors follow all three,” said senior managing director Danny Finkle, JLL’s retail co-leader in capital markets. “When we look at traditional retail underwriting, we look at cash flows over 10 years and aim to be able to forecast annual rent increases of around 2-3%. These markets are already outperforming right now, and their market dynamics suggest they will continue to do so. »
Rent growth is driven by continued occupancy growth that has yet to be offset by retail deliveries, which peaked in 2017 with nearly 30 million square feet delivered in these buoyant markets. As deliveries have declined every year since 2017 – with one notable exception in 2020 – occupancy has increased to its 2021 year-end level of 95.5%.
2022 has started with a positive outlook for retailers as store openings outpace store closings for the first time after three consecutive years of net closings. Year-to-date, only 11 retailers have announced about 720 store openings over the next two years with just 47 closings.
“The total space required by store openings is almost double the space that will be released,” added senior managing director Barry Brown, JLL’s co-head of retail in capital markets. “This provides additional stability for investors in retail assets.”
Additionally, net absorption in growth markets like Dallas-Fort Worth, Atlanta, Tampa, Phoenix, Charlotte, Denver and Orlando exceeds most traditional markets. The exception is Chicago, which continued to showcase its outstanding retail fundamentals.
“Institutional investors have been paying attention to rental growth opportunities over the past few years and have deployed strategies to increase allocations to these dynamic markets,” said Chris Angelone, Senior Managing Director, JLL Co-Lead Capital Markets. capital. “The reality is that with so little new retail construction, there is upward pressure on rents across the country for high-quality retail. Owners and investors will see outperformance across their portfolios. »
Analyzing data from CoStar, JLL Research identified four markets on the precipice of higher rental growth than retail. Analysts predict that Las Vegas, Orlando, Salt Lake City and the MSA of Boise will experience double-digit rent growth of 12-21% before 2025. These markets are in the midst of a population boom, with a 14-26% increase in the number of residents, and are identified key areas for future investor demand.