Top 10 Markets for Retail Rent Growth

By now, most everyone knows that the internet hasn’t killed bricks-and-mortar retail. It lives on, but differently as retailers figure out the right blend of e-commerce and maintaining a physical location.

Shopping malls have taken the brunt of store closings. Local centers took a hit as well but didn’t fade away. A shift toward “experiential” retail helped make stores and shopping centers more engaging to consumers.

In fact, vacancy rates have declined on average to 4.4%, nearly three percentage points lower than a decade ago. Average rents have climbed in many of the big cities around the country, far exceeding the 1.4% national average, chiefly because of a dearth in construction.

Most new retail construction involves smaller square footage with grocery-anchored centers and mixed-used development. In some cases, developers have demolished old malls to redevelop the site for a mixture of uses such as residential, office and hotels and retail. But the retail tends to be a fraction of what existed with the former mall.

Increasing rents can only go so far, however, according to Arthur Perlen, principal in Centennial Retail Services in Nashville. The business provides services such as leasing, tenant representation, investment sales, property management, and consulting.

Perlen said the biggest problem is land costs have gotten so high. When considering building a new retail center, the relatively high cost of the real estate is likely to make it difficult to establish a rental rate that makes sense to a retailer, he said. “There’s an absolute amount they can pay based on their sales.”

Rent can rise as long as the retailer’s sales rise, and if sales don’t increase or flatten, Perlen said “there is going to be a limit on rent increases.”

Using recent data gleaned from CoStar, here are the Top 10 cities for average rent growth for retail real estate over the past 12 months.

(Tie) 9. Miami – 3.7%

The South Florida city has weathered changes in the retail industry well. “Miami is a city that has long placed a strong focus on experience,” according to CoStar’s Miami market report. The city has capitalized on the high number of visitors each year with such projects as Brickell City Centre, a $1-billion, 4.9-million-square-foot mixed-use development in downtown Miami that started in 2016. Miami has the highest level of retail under construction in the Top 10 with 3.8 million square feet.

(Tie) 9. East Bay, California – 3.7%

Oakland is the biggest city in the area. Its rental growth is actually lower now than a few years ago. CoStar’s market report for the area noted that the East Bay took about four years to recover from the recession and then rents took off, averaging more than 5% for several years. Lack of significant new retail construction helped along with job, income and population growth.

8. Seattle – 3.9%

The city, of course, is the headquarters of Amazon, a company that had perhaps the biggest impact on reshaping brick-and-mortar retail. But Amazon certainly didn’t kill retail in the Seattle region. The vacancy rate is at its lowest level in 10 years, according to CoStar’s Seattle market report. Still, like a lot of cities, retail construction has been relatively sparse. About 1.1 million square feet is under construction now, just 0.6% of total retail space in the Seattle area.

7. Las Vegas – 4.2%

During the recession, CoStar’s Las Vegas market report said vacancy rates went into the double digits and retail rental rates declined from 2008-2013. Its economy recovered with the help of tourism, which brought in 42 million people last year. That combined with little new retail construction is expected to maintain rent growth.

(Tie) 5. Atlanta – 4.3%

The city’s retail vacancy rate is nearing its historical low, according CoStar’s Atlanta market report. Retail rent rates dropped for several years after the recession. Since about 2014, rent growth has trended up with demand outstripping what little new retail construction has occurred. Atlanta has the most retail space of the Top 10 with 356 million square feet.

(Tie) 5. Nashville – 4.3%

Music City’s strong economy fueled by job and population growth have helped create the demand that’s filled retail space to the point that vacancies are near historical lows. Like everywhere else, retail construction is slim. “Even if supply exceeds expectations, given the stellar job growth and in-migration in Nashville, retailers should remained interested in the metro,” according to CoStar’s Nashville market report.

Nashville has one of the examples of a defunct mall being torn down and replaced with mixed-use development that includes retail but much less than the mall. Crosland Southeast leveled Bellevue Center, which had opened in 1990, four years ago and built One Bellevue Place, a mixed-use development that has 375,000 square feet of retail space. The original mall had about 1 million square feet.

4. Detroit – 4.8%

Motor City has the second-largest amount of retail space in the Top 10 at 256 million square feet. With a dozen Fortune 500 companies in the area, there are a variety of high-income neighborhoods around the Detroit area that have created strong demand for retail. There’s about 1.3 million square feet of retail under construction, 0.5% of the total retail space in the area. CoStar’s Detroit market report notes that rent growth should continue.

(Tie) 2. Jacksonville, Florida

(Tie) 2. Tampa

1. Orlando

All three cities have “more or less outperformed the nation for the last five years or so,” said Brian Alford, CoStar’s director of market analytics for central Florida. Alford said Orlando, Tampa and Jacksonville have similar retail success stories – “high-growth economies, robust job growth and very high in-migration fueling high household formation”.

They also have tourism, notably Orlando. Visitors don't tend to shop online when visiting. They buy in physical stores.

Alford said all three have minimal construction. “Barring a dramatic increase in retail construction, which is unlikely, it is likely all three markets will continue to outperform the nation over the near future,” he said.

The result is big-time investors have been snapping up retail properties in the three cities at rate that's among the best in the country, according to Alford. He said money from Institutional investors – pension funds, real estate investment trusts, insurance companies – has been flowing in from other areas.