Wednesday, January 07, 2015

Reis: Strip Mall Vacancy Rate declined in Q4, Regional Mall Vacancy Rate Increased

by Bill McBride on 1/07/2015 11:06:00 AM

Reis reported that the vacancy rate for regional malls was increased to 8.0% in Q4 2014 from 7.9% in Q3. This is down from a cycle peak of 9.4% in Q3 2011.

For Neighborhood and Community malls (strip malls), the vacancy rate decreased to 10.2% in Q4, from 10.1% in Q3. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.

Comments from Reis Senior Economist Ryan Severino:

[Strip Malls] The retail market recovery marched forward during the fourth quarter, but remained at a snail's pace. Net absorption once again exceeded the scant levels of construction in the market which pushed the vacancy rate for neighborhood and community centers down by 10 basis points to 10.2%. Asking and effective rent growth both accelerated slightly versus last quarter but the quarterly growth rates are so weak that any difference is marginal and insignificant. Vacancy remains far too elevated for rents to grow at a much faster pace than we have observed in recent quarters.

[Regional] During the fourth quarter, regional mall vacancy increased by 10 basis points to 8.0%. This is the first quarterly increase in the mall vacancy rate since the third quarter of 2011. For 2014, the mall vacancy rate was also up 10 basis points. Although the mall recovery cycle is fairly mature at this juncture, the primary culprit for the increase in the vacancy rate was the closing of a number of Sears stores during the fourth quarter. However, the market recovery had been losing steam before this with the national vacancy rate flat for most of 2014. While there is no new construction in the mall subsector, demand should increase along with the recovery in the economy and labor markets in 2014. Therefore, we do not believe that this quarter is a reversal in fortune for the mall sector. However, any improvement in demand will come from average‐caliber malls. Vacancy at high‐end malls has just about vanished, giving their landlords strong pricing power, but little ability to increase NOI due to occupancy change. Vacancy at average malls remains relatively high and still has significant room to compress over the next few years.
Mall Vacancy Rate Click on graph for larger image.

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.

Mall vacancy data courtesy of Reis.