Vacancies for neighborhood and community centers were unchanged during the third quarter and now stand at 10.5%. This rate is down 30 basis points from one year ago and is just a paltry 60 basis points below the peak vacancy of 11.1%, recorded during the third quarter of 2011. This modest vacancy compression was predominantly due to weak demand with only 2.3 million square feet of space absorbed this period, the slowest rate of increase in occupied stock this year. Consumer confidence remains fragile in a volatile political and economic environment, especially among lower-income households, keeping demand in check.
A total of 1.5 million square feet of new space came online, the largest volume of quarterly additions from new construction thus far in 2013. However, given the continued necessity of pre-leasing in order to secure financing for the development of new centers, there was very little demand for existing inventory during the quarter. Retail continues to be a segmented market, with growth at the top, catering to more affluent consumers whose levels of discretionary income have not been dramatically altered, and at the bottom, catering to a broader consumer base that has been more severely impacted by a challenging labor market and muted income growth. This is exemplified by the performance of the grocery segment, the most desirable of anchor tenants for neighborhood and community centers. High-end gourmet grocers and heavy discounters continue to expand while the middle market struggles with the loss of its customer base, closing stores in the process.
Asking rents grew by 0.3% this quarter, while effective rents grew by 0.4%. This rate of growth follows roughly the pace of the last couple of quarters, and represents a slight acceleration compared to 2012’s average quarterly growth of between 0.1% and 0.2%. On an annual basis, asking and effective rents both grew by 0.5% in 2012, so the market appears on track to record approximately double the rate of growth in 2013. This is certainly a welcome development for retail property owners and investors, suggesting that landlord pricing power, which declined severely for the three years from 2008 through 2010, might begin to stabilize as vacancy gradually tightens. Cap rates are still hovering around 8.0%, but this average is somewhat misleading as the market continues to display selection bias and be dominated by high-quality deals. Many properties that would trade at far lower cap rates are not being consummated which is skewing the data.
Reflecting a retail landscape segmented by incomes and affluence, the top 10 markets ranked by lowest vacancy rate remain in California, the New York suburbs, and the Washington, DC suburbs. The markets with the highest vacancy rates continue to be the areas with underlying structural economic and demographic challenges, such as Cleveland, Indianapolis, Columbus, and Dayton. Although this performance pattern is consistent with long-term trends, the spread between the highest-and lowest-vacancy markets has widened considerably in the comparatively weak economic environment of the last five years. For example, the spread is currently 1260 basis points, compared to 850 basis points at the end of 2007 before the onset of the recession.
At the metro level, rent growth from quarter to quarter remains somewhat erratic, emblematic of a sluggish and inconsistent recovery. However, on a year-over-year basis, clearer patterns are present. Among the top 11 markets ranked by highest effective rent growth during the last year, eight are in Connecticut, Florida, and Texas.
Regional and Super-Regional Malls
Malls have generally experienced a stronger recovery relative to their smaller brethren shopping centers; national vacancies peaked at 9.4% in the third quarter of 2011, and have descended at a faster pace than neighborhood and community center vacancies. Third quarter mall vacancies stand at 8.2%, down 10 basis points from the second quarter and down 50 basis points year over year. Asking rents grew by 0.4% in the third quarter and 1.4% from twelve months prior. This is the tenth consecutive quarter of rent increases at the national level for regional malls.
However, much of the “have and have-not” characterization of the world of shopping centers also applies to regional mall performance across the country. The healthiest regional malls, usually owned or operated by larger REITs like Simon Properties, benefit from vacancy rates much lower than the Reis national average: Simon Property’s latest results for their malls and premium outlets, for example, boast a 90 basis point decline in vacancies from June 30, 2012 to June 30, 2013 (with vacancy levels currently at a tight 4.9%). There are, however, millions of square feet of older malls with vacancy rates often more than double that of Simon’s enviable sub-5% benchmark. For many of them, mall traffic remains anemic, trending flat to downward. This is reflective of increased competition from online retailing, a lack of fashion newness, little product innovation, and increased competition from high end outlet centers. Growth at these outlet centers is accelerating; examples include recent new stores opened by both Nordstrom Rack and Saks OFF 5th.