Economy Watch: Retail Continues Its Slow Recovery

While commercial real estate's retail sector recovery has been slow since the Great Recession, it continues to improve with vacancies edging down and rents slightly up.

The retail sector has suffered the commercial real estate’s most sluggish recovery since the recession, partly because of the hangover from robust building in the 2000s, and partly because the wider recovery has inspired only anemic wage gains. A pattern of slow improvement for the property sector continued in 2015, according to the 4Q 2015 Reis report on the sector. Vacancies edged down, rents were up slightly and absorption is outpacing construction, mainly because construction is so slow.

“The dynamic that has existed for most of this recovery persisted in 2015,” noted Reis Senior Economist Ryan Severino. “The best space was snatched up relatively early in the recovery, leaving the more difficult space behind.” Neighborhood and community center vacancy declined by 10 basis points during the fourth quarter to 10 percent, while mall vacancy also declined by 10 basis points to 7.8 percent, Reis noted. For both retail subsectors, supply and demand were more or less equivalent during fourth-quarter 2015.

Asking and effective rents for neighborhood and community shopping centers both grew by 0.5 percent for the quarter, a rate more or less the same as during the last five quarters. Over the last 12 months, asking and effective rents grew by 2 percent and 2.2 percent, respectively. That’s slightly stronger than the 1.8 percent and 2 percent that asking and effective rents grew by last year. Regional mall asking rents rose by 0.5 percent, the 19th straight quarter of positive rent growth.

New completions of neighborhood and community centers were once again relatively limited, with just 2.121 million square feet coming on line during the fourth quarter of 2015. That’s a small improvement from the prior two quarters, when new completions were below 2 million square feet in each quarter. Net absorption of 2.873 million square feet was the largest figure since the first quarter of 2015, but still remains low relative to historical trends in the subsector.