Report paints brighter picture for retail

After a dismal couple of years in the retail sector, a rosy report from the real estate investment firm Marcus & Millichap says vacancy rates and tenant concessions in Indianapolis are falling while rents and sale prices are poised to rise.

The report predicted retail spending in the market would continue growing, fueled by the addition of 16,000 jobs in the metro area, including 4,000 highly paid positions in the professional and business-service sectors.

That should fuel enough retail leasing activity to pull the vacancy rate down from 12.4 percent at the end of the first quarter to 11.9 percent by the end of the year, Marcus & Millichap said.
 
Asking rents will tick up less than a percent this year, to $14.26 per square foot, but effective rents will grow by 1.6 percent, to $12.13 per square foot. That’s a reflection of landlords granting fewer concessions to tenants. Concessions as a percentage of asking rent are predicted to fall to 14.9 percent this year in what would be the first year-over-year reduction in concessions in almost a decade, the report said.

Recent growth in the retail sector hasn’t yet caused a big bounce in sales of retail properties, Marcus & Millichap said. Buyers are back in the market, attracted by retail sales growth and low interest rates, but a lack of quality listings has suppressed sales.

The report predicts the supply of listings will grow as sellers try to take advantage of renewed interest among buyers.

Jordan Klink, an investment specialist with the local office of Marcus & Millichap, said the rising gas prices that crimped consumer spending after data for the report was finalized shouldn’t dramatically affect the local retail landscape.

Klink said the demand for properties among investors continues to be high in spite of fuel prices, which have trended down in recent weeks.

“Owners are evaluating and believe this is the time to get in,” he said.

Marcus & Millichap recently listed a 10,600-square-foot retail center that is 100 percent leased even though it commenced construction in 2009 during the depths of the recession. The Meijer Shops of Carmel at 1430 W. Carmel Drive is getting interest from regional and national investors because it’s in the strong Carmel submarket, Klink said.

Reports that characterize an entire market are useful to a point, but retail remains very location specific, said Scot Courtney, president of the local office of Lee & Associates.

Carmel and other submarkets, such as Castleton, Clearwater and Keystone, are a good reflection of the ongoing recovery, Courtney said. “If you compare what was happening 24 months ago to today, it’s a different world.”

Courtney agreed that concessions for tenants are beginning to soften. “Incentives are still stronger than they’ve been in a long time. It’s still a tenant’s market, but the market is improving from a landlord’s perspective.”

He said gas prices aren’t affecting the retail real estate market yet, but there is concern. “We’re going to be a lagging indicator on that,” Courtney said, noting that if the fuel price spike is short-lived, it’s less likely to take a bite out of the retail real estate recovery.