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Boston Area Retail Market Report for Q2 2019


Overview

Despite retail’s challenges across the country, Boston’s retail market has historically enjoyed relatively strong performance. Incomes are approximately 45% higher than the US overall and continue to grow at an outsized rate as a result of strong job growth in high paying medical and technology fields. Boston is also an under supplied retail market and has a notably lower retail per square footage per capital than many other metros (approximately 49/SF per capita). Development has typically been subdued compared to its history, but new projects have open across the metro and leased well. Projects like WS Development’s Seaport Square to Federal Realty Trust’s Assembly Row have complemented office and multifamily inventory with attractive retail tenants, pulling demand both locally and from shoppers across the metro. Other bold mixed-use developments are attempting to replicate the successes of the previously mentioned projects. Boston Properties Hub on Causeway and its 200,000 square feet of urban retail recently wrapped up in North Station and the 400,000 SF Arsenal Yards Redevelopment in Watertown is now fully underway. These mixed-use projects have flipped the dynamics of the retail market, once dominated by a select few areas such as Back Bay’s Newbury Street.

Still, the strongest performance may be in the past. Rent growth in the third quarter of 2019 fell into the red for the first time this expansion. Vacancies, while still below the US rate, have flattened and are even slightly up from their trough in 2017. Store closures may play a role. More than a 1.3 million SF of store closures were announced in greater Boston in 2018, up from 450,000 SF in 2017. Already in to 2019 another 500,000 SF of closures have been announced from the likes of Payless Shoe Stores, Shaw's Supermarket and Dressbarn. For those well-located shopping centers, this trend will likely only be a blip and may even give landlords a chance to bring in new and innovative retailers. But this phenomenon could pose a challenge for aging centers with poor demographics. These centers, typically out near 495 or southern New Hampshire will likely have to be subdivided, converted or need leasing from non retailers, like urgent care centers or self-storage facilities, to sustain occupancies.

Perhaps indicative of investor views of retail nationwide, sales volume has begun to slow in Boston. Volume in 2018 closed below that of 2017 and was more than 18% below that of its cyclical peak in 2016. The same slowdown in sales volume has been evidenced in multifamily and office as well, so declining sales volume may also be due to reinvestment risk. Selling typically means redeploying capital into another asset, which can be challenging with prices as expensive as they are in Boston. Overall cap rates remain low and have remained flat for years, although centers most vulnerable to store closures, namely power centers, have witnessed a slight rise the past several quarters.

Information provided by CoStar.com

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