A Step Up
The national vacancy rate for neighborhood and community shopping centers declined by 10 basis points during the fourth quarter to 10.4%. This was a slight improvement versus last quarter when vacancy was unchanged, but more or less in line with the pace of vacancy compression since the market began to recover two years ago. The national vacancy rate of 10.4% is down 30 basis points during 2013, and down just 70 basis points from the historical peak vacancy rate of 11.1% which was recorded during the third quarter of 2011. This tepid performance reflects the slow rate of recovery in the labor market, particularly the modest job gains and little to no income growth for most households. Moreover, consumer sentiment continues to rebound from a pullback in the wake of the federal government shutdown early in the fourth quarter. Therefore, while retail sales are growing, the pace of growth remains well below the long-term trend.
Yet, there are some modestly hopeful signs. Construction during the fourth quarter of 2.1 million square feet was the highest since the fourth quarter of 2007 while net absorption of 4.5 million square feet was the highest since the fourth quarter of 2007, exceeding construction by roughly 2.5 million square feet during the current quarter. This is certainly a heartening sign because it indicates that there is a modicum of demand for existing inventory and not simply retailers seeking out superior locations by pre-leasing space in the newest and most desirable projects. In order for there to be a broader market recovery, retailers must be willing to commit to seasoned, repositioned centers.
Asking and Effective Rents
Asking rents grew by 0.4% this quarter while effective rents grew by 0.5%. This rate of quarterly growth is the highest in the market since early to mid-2007 before the onset of the recession. For 2013, asking and effective rents both grew by 1.4%. This is roughly triple the rate of rent growth from 2012 and the highest annual growth since 2007. Though quarterly and annual rent growth remain weak by historical standards, accelerating improvement is a welcome sign for investors and developers.
Nonetheless, average asking and effective rents are still below pre-recession highs. However, there is much variation at the local level. Rents in the high-income, affluent metros such as Fairfield County, San Diego, and Orange County have recovered well. However, rents in many metros and submarkets are still well below the peak rents attained during 2008. Furthermore, widening gaps in income and wealth over the last few years have served to exacerbate the rift between these "have" and "have-not" markets. In the "have-not" areas, demand remains depressed, new development activity is virtually if not completely non-existent, and in some of these metropolitan markets, such as Jacksonville, Tucson, and Syracuse, rents continue to fall even as the macro economy and labor market improve.
Malls continue to be the outperformers during the retail market recovery. As of the fourth quarter the national vacancy rate for malls stood at 7.9%, 30 basis points below the third quarter average, down 70 basis points during 2013, and 150 basis points from the historical high level of 9.4% reached during the third quarter of 2011. Asking rents grew by 0.5% during the fourth quarter and 1.6% during 2013. This was the eleventh consecutive quarter of rent increases at the national level for regional malls.
To an even greater extent than with neighborhood and community shopping centers, there exists a divergence in performance between high-quality, dominant malls and inferior malls. The dominant malls benefit from having affluent households as their consumer base. These households prefer the high-level of personal attention and service that comes with shopping in luxury stores. Therefore, they have been voracious consumers, driving up demand for space in the most competitive mall properties. Mall owners, clearly cognizant of this trend, have sought to reposition their malls when possible to capitalize on this. For example, the ownership of the Palisades Center Mall in West Nyack, New York has recently been upgrading its tenancy to more upscale and luxury retailers in order to capitalize on the strong economics and demographics of its trade area.