Moody’s Analytics Forecasts 11% Drop in Retail Rents This Year

Pressured by rising e-commerce even before the COVID-19 crisis and now burdened with wide-scale store closures, retail rents could drop 11 percent in 2020, said Moody’s Analytics, New York.

“The COVID-19 pandemic has prompted unprecedented challenges in the economy, and multifamily and commercial real estate markets are changing rapidly as a result,” said Moody’s Analytics Head of Commercial Real Estate Economics Victor Calanog. “Store closures have made it difficult for retail tenants to pay rent, which has negatively impacted landlords. It is not yet clear how effective government support will be in this sector.”

National retail vacancies will likely rise past historic highs, which will push effective rents down, the report said. An 11 percent drop would constitute nearly twice the total decline in rents the retail sector experienced during and after the Great Recession.

Calanog noted the office sector could also see great distress given the severity of the downturn and social distancing policies implemented to combat the pandemic. National office vacancies could break the 20 percent mark by 2021 as more and more employers execute remote working policies and effective rents in some markets such as New York may fall by close to 25 percent.

“By contrast, industrial and multifamily properties are likely to fare better,” Calanog said. “Vacancies are still projected to rise and effective rents are expected to turn negative, but the impact will not be as severe as on retail and office properties.”

But under one potential situation, Moody’s Analytics’ “protracted slump” worst-case scenario, which assumes GDP contracts by more than 30 percent (annualized) in the second quarter, negative net absorption could approach 200 million square feet for the year and next year could see nearly 70 million square feet of negative net absorption. This severe situation could push the industrial sector’s vacancy rate up to 12.8 percent by year-end 2021. Average asking rents and average effective rents could decline 3.5 percent and 6.0 percent, respectively, by December 2021, the report said.

“The impact on the industrial sector could come with more of a lag than other sectors,” said Moody’s Analytics REIS Senior Economist Barbara Byrne Denham. “This is because most leases are locked in and the impact on trade is more ambiguous. But to be sure, the shutdown in the economy will still hurt the industrial sector, and significant new construction that had been underway will only compound the problem.”