Retail Recovery Still Slow

The recovery is still very slow for the retail segment of U.S. commercial real estate.

Reis Inc. reported on Monday that the recovery is still very slow for the retail segment of U.S. commercial real estate. For instance, the national vacancy rate for neighborhood and community centers didn’t move quarter-over-quarter in 2Q 2015, staying at 10.1 percent. The rate is still stuck because while net absorption exceeds new supply, it isn’t by much—not enough to cause a meaningful decline in vacancies. The vacancy rate for larger malls was also unchanged for the quarter, at 7.9 percent, and similarly mired in mediocre demand for space.

Since this time last year, the overall vacancy rate at neighborhood and community centers dropped 20 basis points, also a fairly modest rate. New construction for these kinds of retail space remains close to nil, with only 1.6 million square feet coming online in this entire country during the second quarter. Rent increases have been modest as well. Over the last 12 months, asking and effective rents grew by 2 percent and 2.2 percent for neighborhood and community centers, and malls, respectively, barely more than the rate of inflation. The report posited that it will be “a number of quarters” before there’s more meaningful acceleration of rent growth.

Where is the demand? “A few things have transpired,” Reis senior economist and director of research Ryan Severino said in commentary provided to CPE. “First, space in the best centers leased up relatively quickly during this recovery and is largely gone. What remains is space that’s a bit more challenging.” In other words, retailers took the recent opportunity to trade up or expand into first-rate space at the expense of older space. “Second, e-commerce, though not the leviathan that it’s often portrayed to be, isn’t helping,” Severino continued. “Many services that people purchase online, such as apps, simply aren’t available for purchase in a physical store. E-commerce slowly takes market share from bricks-and-mortar buildings with every passing quarter.”

Besides that, there are deeper changes at work affecting traditional kinds of retail space, according to the report. The rise of new kinds of retail—such as town centers, lifestyle centers and even power centers—has given shoppers options that they didn’t used to have, and they often come with amenities than older spaces can’t provide. That means there will probably be structurally higher vacancy rates for neighborhood and community centers and malls. Thus they aren’t likely to reach the same low vacancy rates this time around as they did during the previous cycles. In short, although retail sales continue to increase as demand for goods and services increases, the total pie is divided more finely than it used to be, with many more distribution channels now.