Retail Market Trends

Retail Market Trends

By George Ratiu, Research Economist

Research Economist George RatiuConsumer spending has been the main driver of economic growth over the past few years. Rising prices for most consumer goods due to increased fuel costs have curtailed spending. Deteriorating economic conditions due to the financial crunch have also squeezed consumer credit, leaving consumers with less money to spend on retail goods.

Consumer spending grew by only 1.4% in the second quarter and is expected to have stalled to zero growth in the third and fourth quarter. This deceleration is in marked contrast to the 3 to 4 percent real growth in consumer spending during the past 5 years. Consumers have trimmed their spending on all fronts, except necessities. As a result, the retail sector is clearly feeling the pressure. Demand for retail space is dropping, with many companies closing retail outlets across the country.

However, the pace of completions coupled with declining demand, is causing decreases in net absorption. The national vacancy rate is moving up and is projected to reach 10.1 percent by the fourth quarter of 2008. Some of the hardest hit cities are in the Midwest. Topping the list is Detroit, MI with a vacancy rate of 17.7 percent for the third quarter of 2008. Columbus, OH is recording the second highest vacancy rate, at 16.2 percent, followed by Fort Worth, TX (14.2%), Indianapolis, IN (14.1%), and Kansas City, MO (13.6%).

On a positive note, most Southern California markets are posting improvements in vacancy rates compared with last quarter. For the third quarter of 2008, Los Angeles has a vacancy rate of 5.0 percent, while San Diego's vacancy rate is 6.6 percent. Orange County remains on the list of markets with the lowest vacancy rates in the country, at 3.9 percent.

Given the increase in vacancy rates and the number of store closings, average retail rent is expected to remain virtually flat in the third quarter of 2008, at 0.1 percent. For the year, rent growth will likely show only a moderate 1.2 percent increase, compared with the 3.2 percent gain for 2007.

Next quarter, the traditional holiday shopping season, will likely not provide much relief. While gas prices have been declining, the economic slowdown prompted by the financial crisis is leading to continued job losses and deterioration in consumer confidence. Furthermore, retailers are responding to expected lower sales by trimming orders and inventories.

 

Lowest/Highest Retail Vacancy Rates

Q3.2008 Forecast

San Francisco, CA

3.0%

Orange County, CA

3.9%

San Jose, CA

3.9%

Long Island, NY

4.2%

Honolulu, HI

4.5%

Miami, FL

5.0%

Los Angeles, CA

5.0%

Ventura, CA

5.8%

 

National Averages*

9.8%

 

Kansas City, MO

13.6%

Indianapolis, IN

14.1%

Fort Worth, TX

14.2%

Columbus, OH

16.2%

Detroit, MI

17.7%

Source: NAR/TWR

*Not all markets are represented.

 

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