In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Thursday, October 04, 2012

Reis: Regional Mall Vacancy Rate declines in Q3, Strip Mall vacancy rate unchanged

by Calculated Risk on 10/04/2012 11:42:00 AM

Reis reported that the vacancy rate for regional malls declined to 8.7% in Q3 from 8.9% in Q2. This is down from a cycle peak of 9.4% in Q3 of last year.

For Neighborhood and Community malls (strip malls), the vacancy rate was unchanged at 10.8% in Q3. For strip malls, the vacancy rate peaked at 11.0% in Q2 of last year.

Comments from Reis Senior Economist Ryan Severino:

[Strip mall] Vacancy was unchanged during the third quarter. This is slightly worse than the second quarter when the vacancy rate declined by 10 basis points. On a year-over-year basis, the vacancy rate declined by a scant 20 bps. While demand slightly outpaced new construction during the quarter, it was insufficient to cause the vacancy rate to decline. With only 569,000 square feet delivered, any semblance of demand would have caused the vacancy rate to decline. The fact that it did not speaks volumes about the continued struggles that the retail sector must countenance.

Asking and effective rents both grew by 0.1% during the quarter. This represents a slowdown from the already paltry 0.2% growth in asking and effective rents during the second quarter. It was the fourth consecutive quarter that asking and effective rents have increased. Although positive, rent growth remains at dazzlingly low levels.
[New construction] With the ongoing weakness in the sector, new construction declined near record‐levels during the quarter. 569,000 square feet were delivered during the third quarter, versus 805,000 square feet during the second quarter. However, this is a slowdown compared to the 2.008 million square feet of retail space that were delivered during the third quarter of 2011. In fact, 569,000 square feet is the second‐lowest figure on record since Reis began tracking quarterly data in 1999, bested only by the minuscule 261,000 square feet that were delivered in the first quarter of 2011. With demand for space at depressed levels, there is little to no impetus to develop new projects.
[Regional] Malls continue to outperform their neighborhood and community shopping center brethren. The vacancy rate declined by another 20 basis points during the quarter. This is the fourth consecutive quarter with a vacancy decline. Asking rent growth was in line with last quarter, growing by another 0.3%. This was the sixth consecutive quarter of asking rent increases. Overall the improvement in the mall subsector is not accelerating, but it is not faltering either. However, underlying these trends there remains a strong diverge in the performance between dominant Class A malls, which typically boast luxury retailers and cater to affluent consumers, and inferior malls which sport more mainstream retailers and cater to more typical consumers.
Apartment 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.

The yellow line shows mall investment as a percent of GDP. This has been increasing a little recently 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.