Marcus & Millichap

Net-Leased Retail Research Report

National Report, Fall 2017

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Job Growth, Household Formation Powering Retail; Investors Remain Active Amid Stable Rate Environment

Economic momentum remains in place as tight labor markets contribute to steady growth. Driven by consistent job gains and the lowest unemployment rate since the early 2000s, retail sales remain on an upward trajectory. The steady recovery in the labor market has been dominated by advancement in office-using sectors, which combined for more than 734,000 new jobs over the last year, representing the strongest overall sector in the economy. As a result, household formation expanded meaningfully, creating demand for a broad array of retail products, particularly in the durable goods sector. The momentum has also spilled over into building supplies retailers as the new households remodel existing single-family homes amid a shortage of new construction. Looking forward to the remainder of 2017, extremely low unemployment will begin to feed into greater gains in average hourly earnings, which rose 2.5 percent in August. Increases in spending power will likely be deployed as the savings rate has shrunk over the past few years, refl ecting growing confi dence among consumers.

  • Job growth remains steady, with gains averaging 174,000 positions per month over the past year. As a result, the unemployment rate fell to 4.4 percent, the lowest level since 2001.
  • The formation of nearly 1.5 million households this year will drive demand in a number of retail categories, particularly durable goods such as furniture and building materials.
  • Core retail sales advanced 3.3 percent year over year in July, highlighting the strength of consumers. Lead growth categories include e-commerce, building materials and garden supplies, and furniture and home furnishings.

Stabilization of interest rates supporting net-lease market; concern for 1031-exchange revisions remain unanswered.Following the sharp move in interest rates last year, the tight range of long-term interest rates in 2017 has provided a more normalized transaction environment. Spurred by the limited use of leverage in the asset class, buyers have remained focused on properties in quality locations backed by strong nationally accredited tenants. Looking ahead, legislative changes from Capitol Hill remain in flux, although further clarity on regulatory and tax code changes could spark greater urgency among investors to transact before or after the changes are implemented. The most acute issue under discussion is the status of the section 1031 tax-deferred exchange. Driven by investor’s desire to shift their portfolios towards less management intensive assets, 1031-exchange volumes make up a considerable portion of the net-lease marketplace. In 2017, exchange-related buyers encompassing more than 40 percent of transaction volumes. As a result, the status of this tax provision moving forward will remain a major driver of deal flow and investment demand.

  • Average asking rents have risen 4.3 percent over the past year, reaching $20.21 per square foot nationwide at the end of the second quarter. Average prices per square foot have now exceeded the previous high set in the fi rst quarter of 2008.
  • Net-leased development remains the key driver of overall retail construction, accounting for more than 46 million square feet of the 60.4 million square feet delivered over the past year. Single-tenant construction has averaged 45 million square feet over the past three years.

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