NEW YORK CITY-With Thanksgiving come and gone, Americans' focus has shifted from their bulging waistlines to their wallets. With full-throttle holiday shopping underway, it's an ideal time to look at large East Coast retail markets and determine why Santa is delivering gifts to some investors and lumps of coal to others.
On the whole, the retail property segment has struggled to keep up with the broader economic recovery because both cyclical and secular headwinds have prevented any significant improvement in absorption.
Many markets—particularly those where economies are recovering slowly and employment remains below its prior peak—are unable to drive demand for retail space. This, combined with the ongoing acceleration in e-retail sales, has led to store downsizing and a lack of new openings. Nationally, this has kept vacancies at or near their peak cyclical levels and rents near their trough.
The exception is New York City, where the retail market is strong and healthy thanks to a robust local economy and employment has risen to an all-time high. Additionally, Manhattan real estate benefits from an average household income that is 68% higher than the US level and a high level of tourist activity. These factors have combined to help offset erosion in sales caused by rising e-retail sales. According to LoopNet, tight vacancy levels have driven a 5% year over year increase in rents. As a result, the most recent property ratings from Auction.com Research give New York a 1, our strongest market rating on a 1-6 scale.
Long Island has a similar story. Local employment is at an all-time peak and an average household income is on par with Manhattan. Retail vacancies in Long Island are a tight 5.3%, and have driven gains in rents of 1.8% over the last year according to REIS data. This is slower than the NYC rate, likely to due to the significantly lower tourist activity in the metro. Long Island is rated a 2 in our ratings as the lower rent growth will result in somewhat less robust NOI generation.
This brings us to Philadelphia, which contrasts the strength in the New York area and serves as a notice of how important the local economy is to retail property fundamentals. Like New York, Philadelphia has a solid tourism industry, but its local economy has underperformed during the recovery, leading to a vastly different retail landscape. Employment in Philadelphia is still 2.3% below its prior cyclical peak, and average household income is just 17% above the national level. This has resulted in retail vacancies that are stuck near their cyclical peak in the mid-9% range, despite an absence of supply additions. Additionally, effective retail rents are rising by just 0.5% year over year according to Reis data and are only 1.2% above their cyclical trough.
Chris Muoio is a senior associate and economist at Auction.com. The views expressed in this column are the author's own.
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