Demand For Commercial Retail Space Continues Decline

Despite significant U.S. economic expansion, the retail sector continues to wane with store closings and space shrinkage dominating the market.

“Even major retailers that have not formally filed for bankruptcy yet, such as JCPenney, are downsizing their operations, focusing now on only their most profitable locations,” said Peter Muoio, Chief Economist with Ten-X, Irvine, Calif.

Adding to the deteriorating retail market is the fact that effective rents are growing very slowly, projected to finish 2018 just 1.8 percent higher than last year–slower growth than the overall inflation rate–Muoio noted.

Barbara Byrne Denham, Senior Economist with Reis, New York, said the vacancy rate in shopping malls jumped to 9.1 percent in the third quarter from 8.6 percent a year ago. “The increase was due to a number of Sears stores that finally closed their doors in early August,” she said. “Of the closed Sears stores, many were owner-occupied and thus not included in the Reis statistics. Therefore, vacancy would have been somewhat higher if they had been included.”

As the vacancy rate jumped, average mall asking rents declined 0.3 percent in the third quarter–the first quarter to see a rent decline since 2011, Byrne Denham said. The mall rent figure had increased 0.4 percent per quarter on average for the last two years.

“We believe that most retail shopping centers have prepared for the inevitable closings and many landlords have lined up re-development plans or new leases,” Byrne Denham said. “The positive net absorption and flat vacancy rate for neighborhood and community shopping centers [as opposed to larger shopping centers] suggests that owners can fill empty space more readily than many would believe.”

Muoio said Ten-X has seen continued gains in retail property pricing and healthy deal volume as investors look to existing sagging properties as redevelopment plays. “Indeed, e-retailers are increasing their bricks-and-mortar presence,” he said.

Ten-X studied factors including vacancy, rent growth and market net operating income, and ranked metros including Salt Lake City, Utah, Indianapolis, Seattle, San Francisco and Austin, Texas the best “buy” markets for retail investors. “While the retail market as a whole is struggling, these few areas are noteworthy for investors and retailers,” Muoio said.