Reis Reports Mixed Retail Results

The vacancy rate for neighborhood and community shopping centers increased to 10 percent in the third quarter, while larger malls saw vacancy fall to 7.8 percent, reported Reis, New York. 

“For the second straight quarter, the two retail subtypes see-sawed in opposite directions,” said Reis Economist Barbara Byrne Denham.

Overall, retail sector market conditions softened in the third quarter, “but we had expected this deceleration,” Byrne Denham said. “Much of the slowdown in net absorption in the third quarter was likely a delayed response to weak economic conditions in the first quarter.” She noted that job growth has improved “considerably” in recent months but said retail tenants may choose to delay leasing decisions until after next month’s presidential election.

Regional malls have outperformed smaller neighborhood and community centers throughout the recovery as the Class A malls cater to wealthier consumers, Byrne Denham said, noting that neighborhood and community centers lagged because slow household income growth kept a lid on discretionary spending. “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,” she said.

Reis reported that asking and effective retail rents for all shopping center sizes grew by 0.4 percent in the third quarter. On a year-over-year basis, asking and effective rents grew by 1.9 percent, decelerating from previous annual growth rates above 2 percent. “Without a meaningful drop in the vacancy rate, we can expect this slow rate to persist for the next few quarters,” the report said.

Byrne Denham said future rent growth will depend on stronger demand. “We expect net absorption to increase over the next few years, but older retail properties will have to change substantially in order to defy the market forces stemming from the growth in e-commerce and new retail subtypes,” she said. She noted that smaller neighborhood and community centers face the possibility that slow growth trend may be more of a structural change than a temporary cyclical phenomenon.

“Some properties will continue to outperform others just as some markets will outperform others,” Byrne Denham said. “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.” She said rent growth should stay positive for larger malls as well, but she expects little change in their vacancy rates. “As we have mentioned, the gap between the winners and losers at the property level should continue to widen over time,” she said.