THE EVOLVING COMMERCIAL MARKET Commercial sales volume is strong and the cost of those sales is trending higher even as tightened commercial real estate inventory means fewer total transactions, according to the National Association of REALTORS® (NAR) 2018 Commercial Member Profile. What’s ahead for 2019? NAR’s Commercial Real Estate Outlook: 2018. Q3 expects the reduced corporate tax rate to spur increased consumer and investment spending, unemployment to fall even lower and the economy to shift to full capacity. The commercial market is on track to see “solid demand and increasing cash flows,” according to the outlook. Vacancy rates will vary with multifamily experiencing growing availability, office and retail property vacancies moving sideways and steady rent growth for industrial spaces, the outlook projects. K.C. Conway, chief economist for the CCIM Institute, and Illinois REALTOR® Marty Smith, a commercial broker in Champaign, take a closer look at what is happening in a market segment of interest to many – commercial retail. Conway points out that even though some major retailers bowed out in 2018, the overall retail sector showed signs of strength. And Smith spotlights how old neighborhood malls can find new life as mixed-use properties.
TIME TO RETELL THE RETAIL STORY
K.C. Conway
MAI, CRE CCIM Chief Economist & Director of Research, Alabama Center for Real Estate at the University of Alabama
If you only read media headlines about the retail industry and recent bankruptcies and store closings, you would believe the sensational characterization that the industry is in a “retail apocalypse.” But as Col. Potter from the “MASH” television series responded to mischaracterizations, I too, would respond to the idea of a “retail apocalypse” with, “horse hockey!” It is time to objectively re-examine the facts and retell the retail story. The real retail story in 2018 was quite the opposite of apocalyptic. Start with retail sales and retailer 22 www.IllinoisRealtors.org
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earnings. Even as 2018 headlines were dominated by Toys ‘R’ Us and Mattress Firm bankruptcies, there were areas of the market that exceeded expectations. Used auto and gasoline sales were higher, as were earnings for retailers such as Home Depot, which had higher sales driven by homeowners remodeling and other rebuilding after last year’s hurricanes. Retailers Macy’s and Kohl’s had stronger than expected earnings, boosted in part by apparel and backto-school shoppers. And by mid-2018, Wal-Mart had posted its best earnings in a decade with even grocery and online sales up 40 percent. If that is not enough to convince you that there isn’t a “retail apocalypse,” then how about the following performance measures? u By mid-2018, PREIT, a large real estate investment trust that invests in malls, said it had leased all its anchor and big-box retail vacancies. PREIT Chief Financial Officer Bob McCadden also expected no further anchor closures to be announced in 2018. PREIT also noted a 300-basis-point increase in operating results from the first quarter of 2018. When was the last time you had those kinds of results on a mall portfolio? u TREPP Research released a midyear report on the state of retail and analyzed more than 34,500 retail real estate loans across the U.S. It found retail commercial mortgage-backed securities (CMBS) properties in recovering markets
have posted consistent year-over-year net operating income (NOI) growth in the years following the financial crisis. Retail occupancy figures have recovered to levels just below their pre-recession prime. And retailers investing in tech innovation and experiential formats are positioning themselves to thrive in the future as the line between e-commerce and physical distribution channels converge. A few retailers at the front of that shift are PGA Superstore, Batteries Plus and Top-Golf. Not all retail is performing to perfection, but it’s not apocalyptic either. There are two final trends to monitor in 2019, one good and the other not. The good news is that retail buildings are increasingly being repurposed and put back into productive reuse, which enables communities to combat the blight from vacant stores and add revenue back to sales tax coffers. The CCIM Institute and the Alabama Center for Real Estate (ACRE) at the University of Alabama collaborated on a report, “Adaptive Reuse: Turning Blight into Bright,” that looks at this trend. One example worth noting is a mall converted into a warehouse outside Dallas, Texas. bit.ly/ CommercialConversion On the other side is a negative trend worth watching. At least one city outside Boston imposes a fee or tax penalizing landlords with vacant retail space and similar ideas have been under consideration in New York City and San Francisco. What's next, a vacancy tax on empty hotel rooms or unleased