Occupancy continues to be weak in Boston’s 36.5-million-square-foot community-neighborhood shopping center market, although rents are posting modest gains. Positive net absorption, when it occurs, is often timed to coincide with the completion of new shopping centers. “In-line space in tertiary neighborhoods will continue to struggle this year until leasing activity gains momentum,” Marcus & Millichap expects.
Reis reports a community-neighborhood shopping center vacancy rate of 7.1% for the second quarter of 2012, up 20 basis points from the prior quarter and 40 from the second quarter of 2011. The rate had ended 1997 and 2009 at 7.0%, and was also 7.0% in the second quarter of 2010, but the second quarter reading is a new high for the cycle here. It is, however, well below the U.S. and Northeast region averages. The power center segment has a vacancy rate of 5.3% in Boston according to Reis, down 40 basis points from the prior quarter but up 40 from a year earlier. It remains below the U.S. average of 6.3% and the Northeast Region average of 5.8%.
For all retail space, Marcus & Millichap predicts the market will continue to tighten. “Solid job growth will sustain healthy retail spending in Boston this year, while minimal additions to supply and firm demand will underpin a 50-basis point decrease in vacancy to 5.8%,” according to this source, though community-neighborhood center demand is weaker. Reis, in fact, predicts the community-neighborhood center vacancy rate will end 2012 at 7.3%, which would be the highest year-end rate Reis has recorded here in a database going back to 1980. No decrease is expected in 2013. The rate is expected to begin falling in 2014, but will remain above 6.0% through 2016 according to Reis. It had been below that level for most of the 2000s.
SUPPLY AND DEMAND
A recession-induced slowdown in new community-neighborhood shopping center space continued in the second quarter, as no new space was added. New supply had averaged 412,600 square feet per year from 1991 to 2011, but just 206,000 square feet is expected to come on line this year, all in the second half. There is, however, 696,000 square feet of community-neighborhood center space under construction, and another 509,000 square feet of planned space with a development schedule. Reis predicts new supply to total 1.1 million square feet in 2013, the most since 1990, and an above average 541,000 in 2014 before slowing again.
For now, however, the problem with community-neighborhood center occupancy is community neighborhood center demand. Net absorption was negative in four of the past five quarters, including minus 35,000 square feet in the second quarter of 2012. The only positive quarter in that period was the third quarter of 2011, when 86,000 square feet of new space came on line. Reis predicts positive demand for the second half of the year as new supply resumes, leading to a 2012 total of plus 56,000 square feet. While net absorption is forecast at 1 million square feet in 2013 and 672,000 in 2014, those are also years of extensive new supply, so the vacancy rate is forecast to remain elevated. Expanding national retailers, it seems, prefer new space, while small business remains weak.
The Boston area had a mixed-use boomlet when residential construction was strong, but weakness in the residential component has slowed that trend. While over 3 million square feet of retail space is planned and proposed in mixed-use projects, just 176,000 square feet is under construction. The 81,500-square-foot Market Basket at Westgate Mall completed construction in Brockton in May. The 400,000-square-foot second phase of the Highland Commons Power Center in west suburban Hudson remains under construction following a September 2011 groundbreaking.
Community-neighborhood shopping center rents continue to edge up in metro Boston, despite weak demand. In the second quarter of 2012 both the average asking rent and the average effective rent increased 0.3%, to $21.83 psf and $19.70 psf, respectively. The year-over-year gains are modest at 0.9% asking and 1.0% effective. Rents had edged up 0.5% in 2011 following two years of small losses. Reis has not recorded an effective rent increase here in excess of 3.3% since 2000. Boston’s power center asking rents are rising slightly faster, reflecting the low vacancy rate. The second quarter rate was $31.27 psf, up 0.5% from the prior quarter and 1.6% from a year earlier.
For all retail space, Marcus & Millichap also reports and expects very limited rent gains. “An uptick in leasing activity, along with limited new construction, will enable operators to lift asking rents 1.0% this year to $21.38 psf,” according to this source. “Effective rents will climb 1.2% to $19.17 psf.” “Market-wide, as vacancy rates decreased, operators were able to boost asking rents 0.8% in the last year to $21.25 psf, including an increase of 0.4% in the first quarter of 2012,” according to Northeast Real Estate Business.
For community-neighborhood centers, Reis predicts rent gains will remain below 2.0% per year until the vacancy rate begins to drop. Thus gains of 1.3% asking and 1.5% effective are forecast for all of 2012, with similar gains expected in 2013. Even in the latter three years of the forecast period, however, rent increases are predicted to remain no higher than the vicinity of 2.5%. As has been the case more often than not since 2000, Boston’s rent increases are forecast to trail the U.S. average.