Signs of Retail Sector Distress Grow

The retail market is starting to see distress as the pandemic enters its ninth month, said Moody’s Analytics REIS, New York.

The retail vacancy rate increased 0.2 percent to 10.4 percent in the third quarter while the average effective rent fell 0.4 percent. The mall vacancy rate increased 0.3 percent during the quarter to 10.1 percent, the highest in more than 20 years. The average mall asking rent declined 0.7 percent in the quarter and 0.6 percent over the year.

“For the first time since the start of the pandemic, the retail statistics finally show the distress that market watchers expected, but not as much as most assumed,” Moody’s Analytics REIS Senior Economist Barbara Denham said in the firm’s Retail First Glance report.

Of the 80 metros REIS studied, 18 had positive net retail absorption and 62 had negative net absorption in the third quarter. For the year, 52 metros had a higher vacancy rate and 66 metros showed an effective rent decline over the year.

On Monday the Mortgage Bankers Association found an 83 percent year-over-year lending volume decline for retail properties. Only the hotel sector saw a larger lending volume drop.

KBRA, New York, reported demand for retail space has been on a declining trend as many retailers have sought to grow their online presence. “The pandemic has exacerbated these trends, putting further downward pressure on rents as increases in tenant arrears, insolvencies and collateral valuation adjustments are seen,” KBRA said in its latest Trend Watch report. “CMBS transactions are unlikely to have retail collateral in the near future due to lockdown uncertainty. However, there will likely be investor appetite for future deals with modest leverage, stable cash flow, and strong sponsors.”

Denham noted REIS expects further retail rent decline and an increase in vacancy in 2021 as more stores could close after the holiday season. “It is hoped that some kind of second stimulus package is signed by then,” she said. “If not, more could lose their jobs which could yield a ‘W-shaped’ recession and would inflict further harm to the retail sector. But the current forecast calls for further growth in overall jobs even if some retail industries may see a second decline in jobs as stores close next year.”