Tim Thompson, Marcus & Millichap

In Boston, continued job expansion has boosted household incomes, which is supporting higher retail receipts in the metro. The city’s strong economic health has enabled robust retailer expansion inside and outside of its core. This is expected to continue into the second half of the year.

By the end of 2015, the unemployment rate in Boston dropped to 3.9%. This year, area employers will lower the unemployment rate again and are on track to add 55,000 to their payrolls this year, representing a 2.1% increase over the previous year. This employment growth will be led by the tech, bioscience and professional services sectors. Examples of this include Google adding 50,000 s/f to its campus in Kendall Square in 2015 to accommodate corporate growth, and GE’s selection of a site in The Seaport for its new headquarters, which will create 4,000 jobs over the next two years.

This hefty job growth has precipitated a large increase in household formation in the Boston metro, and the resulting residential density has generated high retail demand. In turn, strong, persisting demand has supported robust construction activity, and this is expected to remain the case as builders race to complete 1.6 million s/f of retail deliveries by year’s end. Development is focused close to the Boston core, but is expected to start shifting into outlying submarkets such as Southern New Hampshire and areas along Rte. 3 North, including the towns of Chelmsford and Rockingham. Though the pipeline is extensive, pre-leasing activity has mitigated the impact on vacancy. As a result, vacancy is anticipated to fall to 3.1% in 2016, outpacing last year’s vacancy decline.

Retailer demand has outpaced supply since 2010. This consistent demand has not only caused vacancy to compress, but has also supported average asking rent growth. Rent growth has been strongest in towns such as Brookline, Wellesley and Arlington. Though several submarkets have seen average asking rents drop over the past 12 month period ending in March, the Boston metro is expected to see rents increase by 3.5% by the end of the year. The bullish retail property market is also attracting droves of local and out-of-state investors to Boston and is supporting a frothy sales environment.

Over the 12-month period ending in March, single-tenant property transactions surged by 10% compared with the prior 12-month period. The vitality of these retail property investments have caused investors, in some cases, to rethink investment strategy and expand their risk profiles by trading into properties with higher cap rates. Additionally, a growing number of apartment owners are exchanging into single-tenant net-leased assets to take advantage of the low-management options and, in some cases, the higher yields these investment vehicles can provide compared with yields in the core.

With respect to multi-tenant retail properties, in the past 12 months ending in March, the average sale price per s/f jumped 6.1%, while the transaction velocity fell 13% due to very limited availability of these types of properties. Cap rates for Boston shopping centers span from low-5 or below to mid-8% depending on quality and location.

Boston retail properties, both in the core and in its outskirts, continue to capture the attention of investors, driving prices ever higher. With vacancy trending down and rent growth trending up, an aggressive bidding environment is likely to continue.

Tim Thompson is a regional manager at Marcus & Millichap, Boston, Mass.