Wednesday, October 05, 2016

Reis: Regional Mall Vacancy Rate decreased in Q3 2016, Strip Mall Vacancy Rate increased

by Bill McBride on 10/05/2016 12:32:00 PM

Reis reported that the vacancy rate for regional malls decreased to 7.8% in Q3 2016, from 7.9% in Q2, and down from 7.9% in Q3 2015. This is down from a cycle peak of 9.4% in Q3 2011.

For Neighborhood and Community malls (strip malls), the vacancy rate increased to 10.0% in Q3 2016 from 9.9% in Q2, and was unchanged year-over-year from 10.0% in Q3 2015. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.

Comments from Reis Economist Barbara Byrne Denham :

The national vacancy rate for neighborhood and community shopping centers increased to 10.0% in the third quarter. In contrast to last quarter, net absorption fell short of new construction although overall occupancy did increase. The vacancy rate for malls declined to 7.8%. For the second straight quarter, the two retail subtypes see-sawed in opposite directions.

The retail industry has suffered from store closures across the U.S. Reis has been tracking store closures for the larger, more high-profile brands across the country. The Reis database includes 280 store closures in 59 of the 80 primary retail metros that Reis tracks totaling 12.8 million square feet of closed stores across the U.S. The major brands of stores include Walmart, Kohls, Sports Authority, Pathmark, Superfresh, A&P, Waldbaums, Haggen and Kmart. Many of these closures were concentrated in a handful of metro areas including Chicago, Central NJ, Northern NJ, Philadelphia, Long Island, San Diego and Los Angeles – all of which had more than 400,000 square feet of store closures from 2015 through July of this year.

That being said, regional malls have outperformed neighborhood and community centers throughout the recovery as the class A malls cater to wealthier consumers. Neighborhood and community centers have lagged due to the slow growth in median household income that has kept a lid on discretionary spending over the last few years. But recent job growth along with the 2015 median income report showing sharp increases across the U.S. suggest that retail fortunes may improve somewhat after trailing the other property classes over the last five years.
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In short, the retail market faces greater challenges from structural changes than from cyclical issues. Both neighborhood and community centers and regional malls face competition from newer and fresher retail concepts as well as e-commerce. With job growth and gains in median family income across the U.S., the retail recovery should continue. Some properties will continue to outperform others just as some markets will outperform others. We continue to expect vacancy rates for neighborhood and community centers to slowly drift lower and rent growth to increase at a slightly faster rate. Rent growth should stay positive for malls as well, but we expect little change in vacancy rates. As we have mentioned, the gap between the winners and losers at the property level should continue to widen over time.
emphasis added
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.

Currently, both the strip mall and regional mall vacancy rates are mostly moving sideways at an elevated level.

Mall vacancy data courtesy of Reis.