Reis: Large, Small Retail Centers Part Ways

Tucker, Michael

July 12, 2016

The retail sector's two largest subtypes are trending in opposite directions, reported Reis, New York.

Reis Senior Economist and Director of Research Ryan Severino said the national vacancy rate for neighborhood and community shopping centers declined by 10 basis points to 9.9 percent during the second quarter while large malls saw vacancy increase 10 basis points to 7.9 percent.

"This divergence in fortunes is mostly about timing," Severino said. "Regional malls started to recover earlier than neighborhood and community centers due to the strong outperformance of Class A malls, which cater to high-income, affluent households. These Class A malls were the clear outperformers coming out of the recession. Neighborhood and community centers were laggards because demand was tepid; many households were--and some still are--struggling in the aftermath of the recession. With limited income growth these households had modest discretionary income and little ability to spend."

But Severino said this trend has abated somewhat in the post-recession years, "which is fueling slow increases in spending in stores and demand for retail space in neighborhood and community centers."

Many traditional mall tenants are struggling, causing landlords to sign leases with non-traditional tenants, Severino said. "For many traditional tenants, the outlook is not good," he said, noting that department stores have seen better days while apparel retailers compete fiercely with e-commerce. "Malls are not dead, but there will be a harsh separation between the winners and losers over the medium to long term, with more malls going dark over time," he said.

Employment numbers bounced back in June as employers added nearly 300,000 jobs after stumbling in May. But Severino said the retail market faces greater challenges from structural issues than cyclical issues. "Both neighborhood and community centers and regional malls now face a world with greater competition from other retail formats and ecommerce," he said. "This is not going to get easier over time."

Severino predicted the retail recovery should get a bit stronger--at least for neighborhood and community centers--but not dramatically stronger. "Property-specific and micro factors were always the most important for retail," he said. "That is going to become amplified in the future. Vacancy for neighborhood and community centers should drift marginally lower during this recovery while rent growth slightly accelerates." He noted that the rift between winners and losers at the property level will widen over time. "Increasingly this looks like a permanent feature of the market," he said. "The era of pervasive, strong performance in the retail market could be gone for good."

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