by Bill McBride on 4/06/2016 09:53:00 AM
Wednesday, April 06, 2016
Reis reported that the vacancy rate for regional malls was unchanged at 7.8% in Q1 2016 compared to Q4 2015, and down slightly year-over-year from 7.9% in Q1 2015. This is down from a cycle peak of 9.4% in Q3 2011.
For Neighborhood and Community malls (strip malls), the vacancy rate was also unchanged at 10.0% in Q1 2016 compared to Q4, and down year-over-year from 10.1% in Q1 2015. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.
Comments from Reis Senior Economist and Director of Research Ryan Severino:
The national vacancy rate for neighborhood and community shopping centers was unchanged during the first quarter at 10.0%. Although the national vacancy rate technically did not decline, net absorption continues to exceed new construction, a heartening sign for a market that remains mired in a slow but steady recovery. The vacancy rate for malls also did not change, remaining at 7.8%. For neighborhood and community centers, the flat vacancy rate is just a blip, with more vacancy compression likely ahead. However, for regional malls, the vacancy compression cycle has largely ended.Click on graph for larger image.
While results from the first quarter have not shown any acceleration in the retail recovery, the overall economic environment remains conducive to further improvement. The labor market continues to generate more than 200,000 jobs per month on average, wages are slowly but surely inching higher, and retail sales continue to grow. Although the retail market clearly has no shortage of challenges - from e-commerce to new subtypes to experiential shopping - there is no reason to think that the recovery will not persist during the balance of 2016, even if the pace of the recovery does not accelerate much.
Asking and effective rents grew by 0.5% and 0.6% respectively during the first quarter. Quarterly rental growth rates for neighborhood and community centers have been virtually identical for the last six quarters. Consequently, the year-over-year growth rates have also changed very little in recent quarters, with asking and effective rents having grown by 2.1% and 2.2% respectively. Much like with new construction, the linchpin for rent growth is demand, or more specifically greater demand. Until net absorption rises to more robust levels, rent growth will remain stuck near current levels, more or less in line with core inflation. Nonetheless, rental growth is still the strongest it has been since 2007. Admittedly, that is not a high hurdle to clear, but slow progress is still progress.
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.
Currently the vacancy rate is declining slowly and remains at an elevated level.
Mall vacancy data courtesy of Reis.