LOS ANGELES—The retail market experienced modest absorption growth in 1Q15, according to the retail quarter report from Lee & Associates. In fact, absorption was the lowest in the last eight quarters. However, vacancy rates in urban core markets are at an all-time low, illustrating the limited supply and increasing demand for retail product. These fundamentals could lead to retail development in these core markets, which we have yet to see in this sector out of the recovery.

“The vacancy rates are historically low, and I think they are strengthened by low vacancy rates in urban core markets,” Jeff Rinkov, CEO of Lee & Associates, tells GlobeSt.com. “We have seen retail construction kind of lag behind the demand. So, I believe that as construction picks up, we will start to see better absorption. Retail has kind of been the more methodical, slow growth sector on the rent side as well. We have seen what I would consider more moderate rent growth, but I expect to see improvement, especially as new class-A product is delivered.” Rinkov has seen developers with “strong resumes” begin to develop retail projects in core urban markets, but says that outside of those markets, development continues to lag.

During the quarter, national retail saw a mere 15.4 million square feet in absorption, compared with 23.59 million square feet absorbed in the 1Q14 and 34.91 million square feet absorbed in 4Q14. Still, the national retail market had a 6% vacancy rate. Shopping centers had the highest vacancy rates at just over 9%, while general retail had the lowest of the retail property types, with a national vacancy rate that hovers just above 4%. Of the eight individual markets the report reviews in depth—Orange County, L.A. North, San Diego, Dallas, St. Louis, Atlanta, Charleston and Manhattan—vacancy rates fluctuated. Orange County, Dallas, Atlanta and Manhattan were the only markets with declining vacancies, while L.A. North and St. Louis vacancy rates increased. The remaining markets were flat.

The nationally declining vacancy rate also helped to push rents. Nationally, rents rose $0.06 during the quarter to an average of $14.96 per square foot. Asking rents were also up in each of the individual markets, with the exception of St. Louis and Atlanta, which saw decreasing rents—by $0.13 per square foot year over year in St. Louis.

As a result, investors are very bullish on the retail market, especially for shopping center product. “On the investment side, retail gets a lot of attention,” says Rinkov. “Single-tenant retail, multi-tenant retail, supermarket-anchored retail are all still tremendous product types nationally, largely because of the strength of the single-tenant anchor or of the anchor. Cap rates are historically low there and there is significant demand behind those investment sales.”  

As construction of retail product begins to pick up, Rinkov expects a strong year. “I think we will continue to see retailers grow, landlords take advantage of low vacancy rates and we'll see more development at higher lease rates,” he says.

Lee & Associates also released a 1Q15 industrial report, which showed the sector to be booming. With 49.6 million square feet of absorption and historically low vacancy rates, landlords are beginning to increase rents while investors a bidding of a piece of the action.