Bolstered by a relatively modest rate of new construction activity, increasing personal income levels, and lower fuel prices, demand in the national retail market outpaced new supply in all four quarters of 2015, as positive absorption across all property subtypes facilitated improving market fundamentals. Demand for available retail space in the neighborhood/community segment was particularly encouraging during the year. As evidenced by healthy retail sales figures in spite of declining foot traffic and shrinking footprints among big-box retailers, the emergence of e-commerce continues to impact absorption levels in the retail market.
Absorption in the retail market also remained positive across all regions in 2015. From a year-over-year perspective, absorption in the national retail market was strongest in the South region, with the Dallas-Fort Worth, Atlanta, Raleigh, South Florida, Austin, and Orlando markets absorbing excess capacity at the most robust rates. Absorption was also strong in the West region, particularly in the Bay Area markets, with the Phoenix and Las Vegas markets also recording significant improvements in demand for retail space. Although remaining positive for the year, the pace of absorption in the Northeast region appears to be slowing.
Absorption in the Midwest region continued to gather momentum during the year, but absorption figures in the Midwest region remained more modest from a national perspective. Bolstered by competition in the grocery space for market share, the pace of absorption in the Twin Cities retail market increased during the year. Absorption in the Twin Cities market was strongest within neighborhood centers in 2015, with the Northeast submarket logging the most robust demand.
Although new development in the retail sector remains modest relative to historical norms and other property types, construction activity accelerated slightly in 2015 compared to recent years, though a noticeable divergence in activity among retail segments exists. New construction levels of power centers are considerably lower than in previous cycles, while construction activity for grocery-anchored community/neighborhood centers has regained momentum, indicating an improving outlook among smaller retailers.
Development activity also remains bifurcated by location. In contrast to recent cycles, in which developers were chasing rooftops into outer ring suburban and exurban locations, a greater amount of new retail development is occurring in the nation’s urban core, with developers targeting infill sites in walkable and transit-oriented locations.
Among regions, new retail construction activity is strongest in the South region, followed closely by the Northeast and West regions. The amount of new inventory added in the Orlando retail market doubled in 2015 compared to the year prior, with the pace of new construction expected to further increase in 2016.
New retail development remains relatively muted in the Midwest region, but was supported by healthy activity across a number of markets in 2015, including the Kansas City, Detroit, and Indianapolis markets. Retail construction levels remain consistent in the Twin Cities market, and mirroring trends observed at the national and regional levels, a majority of new construction in the local market consists of grocery and grocery-anchored neighborhood space. In contrast to trends observed at the broader levels, however, retail development activity in the Twin Cities market remains healthy in outer ring suburbs, including Woodbury and Plymouth.
Aided by modest new construction activity, the average vacancy rate in the national retail market trended downward by another 20 basis points in 2015, declining into the low-10.0% range at the close of the year. Occupancy levels within the retail sector continue to be highly bifurcated by location, with properties in strong locations within good trade areas thriving and properties in weaker trade areas struggling to regain momentum.
Retail occupancy levels are highest within the West and Northeast regions, though several markets in the South region demonstrated the most substantial improvements in occupancy levels compared to the prior year. In spite of an aggressive pace of new construction and the downturn in the energy industry, retail vacancies decreased in the four largest markets in the state of Texas. Developers delivered nearly 4 million square feet of retail space in the Dallas-Ft. Worth market in 2015, yet occupancy in the market reached the highest levels recorded over the last 10 years.
Vacancies in the Midwest are strongest in the Columbus market, yet the biggest improvement in occupancy levels within the region was recorded in the Detroit market. Retail vacancies declined in the Twin Cities market during the year, and despite healthy demand for neighborhood centers, occupancy levels remain strongest at regional and super regional centers. Among submarkets in the Twin Cities area, retail vacancies are tightest in the Southwest submarket, but encouraging demand, led to the most impressive gains in occupancy levels within the Northeast submarket.
After advancing by 1.0% in 2013 and 1.7% in 2014, asking rents in the national retail market increased by 2.0% over the year ended December 2015. Led by rent growth in excess of 5.0% within the San Francisco, Orange County, Los Angeles markets, the strongest rent growth within the retail sector was noted in the West region during the year, followed closely by the South region. Rent growth within the Northeast region was relatively tame in 2015, decelerating slightly during the course of the year, while rent growth remained generally subdued in the Midwest region. Rent growth in the Midwest region was led by the Indianapolis, Kansas City, and Milwaukee markets, with asking rents also advancing in the Twin Cities market.
On a per square foot basis, property prices in the national retail sector increased by approximately 2.5% year-over-year in 2015, as capitalization rates trended downward by 30 basis points during the year, yet overall sales volume in the national retail market decreased to $82.5 billion in 2015, down 5.0% compared to the year prior. Accounting for approximately 19.0% of all sales activity among the four major property types in 2015, sales activity in the retail sector was strong in the first quarter of 2015 and then tapered off in the remaining three quarters of the year.
Investor interest in the retail sector remains strong for single-tenant net lease assets, with particularly strong competition among buyers for available drugstore and quick-service restaurant assets. Transactions involving net lease drugstores selling for more than $10 million totaled at least 14 in 2015. Five of the 14 sales transactions over $10 million involved net lease drugstores that also sold for more than $1,000 per square foot. The largest net lease drugstore sale transaction during the year involved a 16,000-square-foot Walgreens located along The Strip in Las Vegas. Built in 2000, the property is located along Las Vegas Boulevard, just north of the Wynn and Encore and across the street from the planned World Resorts Casino. Equating to over $2,300 per square foot, the property sold for $37 million in October 2015.
In addition to strong interest for single-tenant net lease assets, investment activity in regional and super regional malls accelerated during the course of 2015, as investors demonstrated renewed interest in obtaining large retail assets in some of the markets hit hardest by the subprime crisis. More specifically, investment interest in larger retail assets increased within the Atlanta, Las Vegas, Phoenix, and South Florida markets. Kimco Realty Corporation purchased the 850,000-square-foot Christown Spectrum Mall for $115.25 million in November 2015. Additionally, a joint venture purchased the Tempe Marketplace in October 2015 for $367 million. Located along the 202 corridor in the city of Tempe, Arizona, the Tempe Marketplace is an expansive open-air super regional mall that is situated in close proximity to the main campus of Arizona State University and Marina Heights.
Further demonstrating improvements in the regional and super regional mall segments, Taubman Centers and Macerich announced an agreement to purchase Country Club Plaza just after the close of 2015. Located approximately four miles south of downtown Kansas City, Country Club Plaza is a 15-block, mixed-use development containing 1.3 million square feet of retail and office space. A sale transaction closed on the property later in the first quarter of 2015 for $660 million. Additionally, MGM Resorts International has reportedly reached an agreement to sell the Shops at Crystals mall to group led by Simon Property Group for $1.13 billion.
Sales volume in the Twin Cities retail market increased by 20.0% in 2015 compared to the year prior. One notable transaction during the year included Heitman purchasing the former Knollwood Mall in St. Louis Park for $106.7 million. Situated along Highway 7, just east of Highway 169, the property has undergone the transformation to a grocery-anchored community shopping center.