Wednesday, July 03, 2019

Reis: Mall Vacancy Rate Mostly Unchanged in Q2 2019

by Calculated Risk on 7/03/2019 06:50:00 PM

Reis reported that the vacancy rate for regional malls was 9.3% in Q2 2019, unchanged from 9.3% in Q1 2018, and up from 8.6% in Q2 2018. This is down slightly from a cycle peak of 9.4% in Q3 2011, and up from the cycle low of 7.8% in Q1 2016.

For Neighborhood and Community malls (strip malls), the vacancy rate was 10.1% in Q2, down from 10.2% in Q1, and down from 10.2% in Q2 2018. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011, and the low was 9.8% in Q2 2016.

Comments from Reis:

The neighborhood and community shopping center retail vacancy rate fell to 10.1% in the second quarter. In Q2 2018, the rate had risen 20 basis points to 10.2% and had remained flat at that rate through the first quarter of 2019. The second quarter marks the first time in which vacancies have declined since the first quarter of 2016.

Both the national average asking rent and effective rent, which nets out landlord concessions, increased 0.4% in the quarter. Last quarter, asking rent grew by 0.4%, while effective rent grew by 0.5%. At $21.39 per square foot (asking) and $18.73 per square foot (effective), the average rents have both increased 1.7%, from the second quarter of 2018.

The Regional Mall vacancy rate was flat in the quarter at 9.3%. The mall vacancy rate had jumped 0.5% in the third quarter of 2018 due to Sears store closings and it had continued to rise each quarter through the first quarter of 2019. Last quarter saw the vacancy rate rise a further 30 basis points to its current level of 9.3%, hitting the highest rate for mall vacancy since the third quarter of 2011. This came in the midst of a number of chains announcing major store closures, such as JC Penney, Payless, Charlotte Russe and Gymboree. In the second quarter, vacancy for malls has remained flat and rent was up 0.2%.
...
As store closures continue to plague the retail sector, many still fear the “Retail Apocalypse.” Yet, the sector has so far been able to ward off the worst of the premonitions. This by no means indicates the sector is without ongoing challenges as a number of stores are still expected to close in the second half of the year and on-line shopping continues to offer stiff competition to brick and mortar stores. Older stores that are not keeping up with new business strategies or modernizing will likely continue to suffer and close in this tumultuous time.

Still, the retail sector has been able to adapt to industry restructuring in a number of ways. Some stores have had success in adopting new business strategies in effort revitalize their brands. On the supply side, empty big box stores have been converting to Self Storage or been sold to developers for redevelopment, former shopping centers have been demolished and there has been a general slowdown in building within the sector. With minimal construction in the pipeline, vacancy rates were able to stabilize a bit this quarter, though the retail sector will likely see more fluctuation ahead.
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.

Recently both the strip mall and regional mall vacancy rates have increased from an already elevated level.

Mall vacancy data courtesy of Reis