by Bill McBride on 7/03/2013 01:38:00 PM
Wednesday, July 03, 2013
Reis reported that the vacancy rate for regional malls was unchanged in Q2 at 8.3%, the same is in Q1. This is down from a cycle peak of 9.4% in Q3 2011.
For Neighborhood and Community malls (strip malls), the vacancy rate declined slightly to 10.5% in Q2, down from 10.6% in Q1. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.
Comments from Reis Senior Economist Ryan Severino:
[Strip Malls] During the second quarter vacancy declined by yet another 10 bps. This is the sixth time in the last seven quarters that vacancy fell by 10 bps. The market is proving to be consistent if not spectacular in its recovery. On a year‐over‐year basis, the vacancy rate declined by 30 bps. The amount of space absorbed continues to slightly exceed the amount of space completed. Since only 914,000 square feet were delivered, the modest improvement in vacancy remains a function of slack demand for space.Click on graph for larger image.
[New construction] With demand for space so meager, there exists no real catalyst for new construction in the market. Consequently, new construction continues to hover near record‐low levels. 914,000 square feet were delivered during the second quarter, versus 1.124 million square feet during the first quarter. This is a slight slowdown compared to the 1.171 million square feet of retail space that were delivered during the second quarter of 2012. In fact, 914,000 square feet is the fourth‐lowest figure on record since Reis began tracking quarterly data in 1999. Although construction this quarter came primarily from new centers and not expansion of existing centers, roughly 60% of the new space that came online during the quarter was in only three projects.
[Regional] The improvement in the malls subsector took a bit of a breather during the second quarter. The national vacancy rate was unchanged during the quarter, this first time this segment of the market did not register a decline in vacancy since the third quarter of 2011 when mall vacancies reached their all time high of 9.4%. Asking rent growth was also unchanged versus last quarter, growing by another 0.4%. This was the ninth consecutive quarter of asking rent increases and on a year‐over‐year basis, rent growth slightly accelerated.
This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.
In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.
The yellow line shows mall investment as a percent of GDP through Q1 2013. This has increased from the bottom because this includes renovations and improvements. New mall investment has essentially stopped.
The good news is, as Severino noted, new square footage is near a record low, and with very little new supply, the vacancy rate will probably continue to decline slowly.
Mall vacancy data courtesy of Reis.