Industrial Spaces to Ease out Retail Properties in Urban Centers, Asserts Augusto Beato

Portland SEO's Augusto Beato asserts that more retail spaces should be quickly converted to industrial spaces such as warehouses as well as hotels and offices to cope with the rise of e-commerce.

Beato was reacting to Ten-X Commercial's latest U.S. Retail Market Outlook, which shows a U.S. retail net absorption turned negative in the second quarter of 2018 for the first time in seven years, indicating a dramatic increase in vacancies across the country.

This drastic change, along with the increase of retail bankruptcies, is largely due to the massive rise in e-commerce sales, which have roughly doubled over the last decade and currently account for 14.5 percent of total retail sales.

"The strong economy cannot rescue the retail space sector from rising vacancy rates and weak rents," said Beato, who is the CEO of Portland SEO. "And while e-retailers are increasing their physical presence, this will not be enough to cover the vacancies."

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The result has been a supply overhang that is forcing landlords into searching for newer, more creative tenants to drive foot traffic.

"Even major retailers that have not formally filed for bankruptcy yet, such as JCPenney, are downsizing their operations, focusing now on only their most profitable locations, said Ten-X Chief Economist Peter Muoio."

Also adding to the deteriorating retail market is the fact that, with the vacancy overhang, effective rents are growing very slowly, expecting to finish 2018 up just 1.8 percent higher than last year, slower than inflation.

Meanwhile, the growth of e-commerce, consumer spending, and an overall strong U.S. economy are credited for the unprecedented demand for warehouses and distribution centers, which continues to outpace supply. Initial data from CBRE shows that about 63 million square feet of industrial spaces were occupied in the third quarter, and in the past year, demand has exceeded supply by 35 million square feet.

This shortage of warehouse space has driven up rents, with an increase of 1.73 percent in Q3 to $7.21 per square feet, an all-time high.