Retail Recovery at a Snail’s Pace

Reis released its latest quarterly report on the U.S. retail real estate market.

Reis released its latest quarterly report on the U.S. retail real estate market on Wednesday. Among other findings, the company said that neighborhood and community center vacancies declined during the fourth quarter by 10 basis points to 10.2 percent, while mall vacancies were up 10 basis points to 8 percent, mainly due to the closure of some Sears locations. Not much movement, in other words: retail recovery, as Reis Senior Economist Ryan Severino puts it, is at a snail’s pace.

It might be slow, but the sector is recovering. Asking and effective rents for shopping centers both grew by 0.5 percent in Q4, slightly faster than during the third quarter. For all of 2014, asking and effective rents grew by 1.8 percent and 2 percent, respectively, the best year for rent growth since 2007. Regional mall asking rents rose by 0.4 percent, marking the 15th straight quarter of positive rent growth.

Reis also pointed out that retail construction activity has yet to mount a serious recovery, since retail fundamentals are still too weak to support much development. Only 1.752 million square feet of new shopping center space was completed nationwide during the fourth quarter. Though that isn’t quite record-low levels, completions remain weak. Net absorption, also low at 3.652 million square feet, is bouncing back from a rough 2014, according to Reis. That’s the highest quarterly level of absorption since the Q4 2013.

FOMC hints at interest rate rise

The Federal Open Market Committee released the minutes from its Dec. 16-17 meeting on Wednesday, and as usual the Fed’s pronouncements about its plans were intentionally vague. But it does seem likely that the central bank is preparing the rest of the world for the moment when it was nudge interest rates upward–which could be as soon as mid-year, but maybe later. “Most participants thought the reference to patience indicated that the Committee was unlikely to begin the normalization process for at least the next couple of meetings.” That hints (but of course doesn’t state) that the Fed is unlikely to raise rates at its January or March meetings. After that? Maybe. Probably.

The timing of an interest rate increase has been the subject of speculation for years, almost since the Fed dropped the federal funds rate to next to nothing because of the panic and recession. Real estate investors and lenders, among others, are watching current developments closely, and there’s some anecdotal evidence that investors are eager to do deals now, or at least very soon, to take advantage of the lowest possible rates. So in effect, the Fed’s vagueness might be driving CRE activity indirectly.

The FOMC minutes made one direct reference to the commercial real estate market. Namely: “Financing for commercial real estate remained broadly available. CRE loans on banks’ books expanded at a moderate pace in October and November, and issuance of commercial mortgage-backed securities was strong. According to the December Senior Credit Officer Opinion Survey on Dealer Financing Terms, broker-dealers had eased somewhat all of the terms on which they finance CMBS for most-favored clients.” In such a (relatively) healthy CRE finance climate, it’s possible that a small upward nudge in rates, while unwelcome, won’t kill too many deals.

Private employers hire

Automated Data Processing said on Wednesday that U.S. private-sector employment increased by 241,000 in December. The report is derived from ADP’s actual payroll data, and sometimes agrees fairly closely with official Bureau of Labor Statistics monthly employment figures–and often does not. So ADP needs to be taken with a grain or two of salt.

The BLS will release its numbers on Friday. There’s been a run of strong official jobs numbers over the last few months, leading to hope that December will be strong as well. That would point to a more robust employment recovery in 2015, and one that might (among other things) help drive demand for more retail space as consumers buy more.

Wall Street yo-yoed back up again on Wednesday, with investors probably satisfied that the Fed isn’t going to be too hasty with an interest rate uptick. The Dow Jones Industrial Average gained 212.88 points, or 1.23 percent, while the S&P 500 advanced 1.16 percent and the Nasdaq was up 1.26 percent.