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Friday, 12 January 2018

It's Not All Doom and Gloom for Retail in the U.S.

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By Holly Tachovsky, Co-Founder and Chief Executive of BuildFax

Does this sound familiar? "Online sales are killing brick-and-mortar retail." It's a popular sentiment, with some predicting the demise of brick-and-mortar retail and the ongoing shuttering of malls and shops.

Despite the headlines, brick-and-mortar retail locations have been buzzing with construction activity. So, what's really going on?

New research from BuildFax examines nearly 17 years of construction data on retail structures in the United States. Here's how it all plays out.

                Figure 1: U.S. Retail Permit Issuance

permitissuanceBUILDFAX

                Figure 2: U.S. Retail Permit Abandonment

permitabandonBUILDFAX

                                                                   Source: BuildFax

Retail Permit Issuance and Project Abandonment – Overview

When looking at retail permit issuance and project abandonment from 2000 to 2017, one overall trend is evident: issuance is outpacing abandonment. Currently, more permits are being issued (Figure 1) and fewer projects are being abandoned (Figure 2).

The evidence suggests that, after recovering from the recession, retail construction activity remains healthy. Additionally, these results may also point toward a positive outlook for the economy. Since fewer projects are being left incomplete, there is likely more confidence in retail construction.

During the previous economic downturn, both permit issuance and abandonment experienced noticeable dips. Despite a slight downturn in the last few years, permit issuance appears to be on a steady plateau. Meanwhile, abandonment rates have plummeted to an unprecedented low.

                Figure 3: Urban Retail Issued Projects
                 vs. Abandoned Projects (2001-2017)

urbanretailBUILDFAX

 

              Figure 4: Suburban-Rural Retail Issued Projects
                        vs. Abandoned Projects (2001-17)

suburbanretailBUILDFAX

                                                                     Source: BuildFax

Urban vs. Suburban-Rural Retail

The plots above show issued and abandoned permits indexed to visualize the differences in their trends. Figure 3 illustrates urban retail issued projects versus abandoned projects; Figure 4 illustrates suburban-rural issued versus abandoned.

For both urban and suburban-rural retail permit activity, issuance is up over the last 17 years and abandonment is down. This mirrors the combined trends illustrated in Figures 1 and 2.

What Happened During the Great Recession?

Interestingly, for both urban and suburban-rural areas, a large gap existed between abandoned projects and issuance even before the economic crisis. There were considerably greater incidents of project abandonment than permit issuance.

Figure 3 shows that, except for a few brief convergences, the gap between abandonment and issuance persisted in urban areas until late 2013. In early 2015, the rate of abandonment dropped dramatically and reversed the trend. Currently, urban areas show a higher rate of issuance than abandonment.

Figure 4 illustrates a similar turnaround for suburban-rural areas in 2015. From 2006 to 2015, these areas saw rates of abandonment and issuance trending together. Similar to the reversal in urban areas in 2015, suburban-rural areas experienced a huge drop in abandonment that has persisted until today.

A Look at Volatility and What It Means

While issuance and abandonment trended similarly for urban and suburban-rural areas, there's one key differentiator to note in these data: greater volatility for urban retail permit activity, especially during the last five years. From 2012 to 2017, urban issuance was 30 percent more volatile than issuance in suburban-rural areas, whereas project abandonment shows about the same volatility in both geographies.

For urban areas, the volatility could be a sign of health, indicating a constant churn in retail construction; businesses are created, renovated, and destroyed with some regularity. It follows that densely populated, urban areas would generate a greater demand for retail space remodels to stay competitive. An example is the rise in popularity of pop-up shops, restaurants, and other limited engagement venues.

For suburban-rural areas, lower volatility indicates that not much is changing. Is it because there's not as much competition in these less-populated areas? Are shops choosing to forgo renovations as online shopping affects suburban-rural brick-and-mortar stores more than those in urban areas?

A Healthy Outlook for Retail Construction

Is retail headed for doom and gloom? No, the construction trends point to a different possibility.

Not only are fewer retail construction projects being abandoned, but in general, retail permit issuance is up nationwide. Additionally, greater volatility in urban areas suggests that retail construction is healthy due to consistent demand for renovations.

Considering the 2015 trend reversal in favor of issuance, the data suggest that perhaps the hype about retail's demise is unwarranted.

Key Takeaways

• Overall, retail permit issuance is up and abandonment is down. This points toward a favorable outlook for the economy.

• Retail permit abandonment is at an all-time low.

• In early 2015, for both urban and suburban-rural areas, the rate of abandonment dropped dramatically. This reversed the trend in favor of permit issuance rather than project abandonment.

• Urban areas experienced 30 percent greater volatility in retail permit issuance than suburban-rural areas from 2012-2017. This increased volatility may indicate urban retail health, as businesses are constantly being created, renovated and destroyed.



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“The Weekly”

“The Weekly” is Commercial Real Estate Direct’s PDF newsletter, sent to subscribers every Friday morning. With over 100 news stories published on Commercial Real Estate Direct each week, “The Weekly” features the top stories in commercial real estate that industry participants need to know first. “The Weekly” also contains:

  • Breaking mortgage, CMBS, and REIT news

  • Quarterly league tables with rankings of B-piece buyers, book runners, and lenders

  • Industry moves and changes in “The Insider“

Additional Info

  • Syndicate to Realpoint: No
  • Sector: Retail
  • Subject: Research (RES)
  • Private: No
Read 383 times Last modified on Friday, 12 January 2018

Data Digest

 

CMBS DELINQUENCY VOLUME

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CMBS SPECIAL SERVICING VOLUME

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Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44

 

RCA CPPI

 

cppichart FP

 

 

CMBS 2.0 Spreads

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Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41

 

 

 

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