The Grindingly Slow Pace of Recovery Continues
Neighborhood and community center vacancies remained unchanged at 10.4 percent. Supply growth remains constrained, with only 650,000 square feet of new space coming online – but demand remains weak, with net absorption coming in at only 840,000 square feet, one of the weakest on record since the so-called recovery began in late 2011. In addition, asking and effective rents rose by 0.4 and 0.5 percent, respectively. This is in line with the quarterly average from 2013, so if you’re feeling optimistic you can certainly call this retail recovery “slow and steady”.
Regional mall vacancies were relatively tighter at 7.9 percent, although it is worthwhile to point out that at the national level this also remained unchanged versus year-end 2013. Asking rents for regional malls did rise by 0.5 percent in the first quarter, one of its strongest showings in recent periods. For all of 2013, asking rents rose by only 1.6 percent so the pricing power of mall landlords appears to be increasing. For premium or dominant malls, operated by the likes of REITs such as Simon Property, vacancies are even tighter – in the neighborhood of 5 percent or lower. In the meantime, malls that aren’t operated by well run REITs are still languishing over the loss of a major anchor tenant, and high profile store closures still make the news regularly.
The outlook for retail looks eerily similar to that for the office sector, with projected vacancies for neighborhood and community centers declining at a slow pace over the next five years, and supply growth coming in at a very measured pace. The key difference versus the office sector graph is that we really did build a lot of retail properties from 2001 to 2008, with retail buildings piggybacking off the housing market boom. When the massive demand contraction hit in 2008 and 2009, oversupplied markets took a massive punch to the nose – retail vacancies rose to 11.1 percent through late 2011 even though the recession had formally ended in June 2009, and to this day remains relatively elevated.
Demand this quarter came from a variety of market types. Southern growth cities such as Houston and Atlanta, tech centers such as San Jose and Denver, and lifestyle markets such as Fort Lauderdale and Palm Beach all ranked among the markets with the most net absorption. The tightest markets continue to be the coastal markets, primarily those around New York City such as Fairfield County and Northern New Jersey, in Northern California like San Francisco and San Jose, and in Southern California, namely Orange County and Los Angeles.