JULY 18, 2018 | THE PALOMAR GROUP
If we’ve learned anything from the first half of 2018, it’s that the economy is firing on all cylinders. While income growth has been somewhat sluggish, consumption continues to be strong, which has helped fuel spending in all retail, e-commerce and brick and mortar alike. The results of that spending have had effects on both the retail and industrial markets. While we have seen a slow down in transaction volume on the retail side, the industrial market has continued to pick up steam, meriting two separate takeaways for the 2018 Q2:
To start with, Retail is proving to be an investment darling in flux. Fundamentals are stabilizing with vacancy rates at a 10 year low of around 4.75% and leasing demand continuing to outpace supply. This is especially true in the Southeast, where we can see the highest growth in demand while maintaining some of the lowest vacancy rates in the country. Orlando is in a class by itself after an increase in demand of almost 2% and a vacancy rate of just over 4%. Opportunities in Power Centers and in multi-tenant centers in secondary markets abound, as the total number of buyers in these asset types have dwindled substantially, decreasing competition and driving cap rates higher. Malls are continuing to become highly polarized, with vacancy rates at C class malls hovering around 8.5% while A class malls are around 2.75%. Rent growth is continuing to moderate, with asking rent growth up 2%, down from 3.5% in 2016. This is even more true in the Southeast, which has the highest rent growth in the country, with Orlando, Raleigh and Nashville leading the charge. Retail closures are almost double what they were in 2017, and investment activity has slowed to around $17B in Q1 of 2018, down from $25B a year earlier. In short, location continues to be king across all retail assets.
Industrial, the new belle of the ball, has continued to benefit immensely from the e-commerce boon. Afterall, as online sales continue to rise, so do industrial needs. With e-commerce continuing to grow, at 16% year over year and 6.8% growth this quarter, industrial will continue to shine. Not to mention that it leads in fundamentals across all asset types and is the only asset class to be in the black across all metrics (2% increase in supply, 2% increase in demand, 6.2% increase in rental rates). As with retail, the Southeast continues to lead the way, with Nashville and Tampa markets holding to 10.5% year over year rent growth. Nashville, Orlando, and Raleigh are experiencing the strongest occupancy rates, while Atlanta leads the Southeast in deliverable square feet, at 5.6 million in Q1, second only to Southern California. Flex space is experiencing a much higher vacancy rate (7%) than logistics (5%), over 45 million square feet of industrial space was delivered in Q1 with over 40 million of that being logistics space. Pricing continues to climb up 8.4% outpacing all other sectors including multifamily (4.3%), office (2.5%), and retail (2%). Sales volumes in all asset classes except multifamily and industrial are slowing year over year. While cap rates are at all time lows, the spread between cap rates and the 10 year treasury (4.3% – 2.7% respectively) still provides plenty of cushion
The largest takeaway? Opportunity abounds in both retail and industrial investing. While The Palomar Group is continuing to see growth and pricing increases in the industrial markets, there may not be a better sector to find value in than retail this year. Retail investors have started to flee to the sidelines, and this has presented significant opportunities in power centers, secondary market multi-tenant retail, and value add assets across all markets.