by Calculated Risk on 10/04/2018 11:59:00 AM

Reis reported that the vacancy rate for regional malls was 9.1% in Q3 2018, up from 8.6% in Q2 2018, and up from 8.3% in Q2 2017. This is down from a cycle peak of 9.4% in Q3 2011, and up from the cycle low of 7.8% in Q1 2016.

For Neighborhood and Community malls (strip malls), the vacancy rate was 10.2% in Q3, unchanged from 10.2% in Q2, and up from 10.0% in Q3 2017. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011, and the low was 9.8% in Q2 2016.

Comments from Reis:

Following months of announcements, a number of Sears and Bon-Ton stores closed their doors in the third quarter pushing the mall vacancy rate to 9.1% from 8.6% in the second quarter and a low of 7.8% in the fourth quarter of 2016. It had earlier peaked at 9.4% in the third quarter of 2011.

The jump in vacancy does not account for a number of owner-occupied Sears and Bon-Ton stores that also closed but are not included in the Reis for-rent mall inventory. While we are tracking all of the closures, we only aggregate the stores that are for-lease in our vacancy and rent numbers.

The average rent at malls declined 0.3% to $43.25 per square foot in the third quarter. Rent growth had been sluggish over the last few quarters but had remained positive. In 10 years, the average mall rent has cumulatively grown 6.5% from $40.62 per square foot in Q3 2008, which was the peak rate in the last cycle.

For the neighborhood and community shopping center sector, the vacancy was unchanged at 10.2% after climbing 20 basis points in the second quarter from 10.0% where it had held steady for four straight quarters. The national average asking rent increased 0.4% in the third quarter as did the effective rent which nets out landlord concessions. At $21.11 per square foot (asking) and $18.48 per square foot (effective), the average rents have increased 1.7% and 1.8%, respectively, since the third quarter of 2017.
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Conclusion
The third quarter saw the brunt of the big department store closings as the vacancy jumped due to Sears and Bon-Ton stores. Our numbers show that more owner-occupied Sears stores closed than for-lease stores which are accounted for in our statistics, yet more of the Bon-Ton stores that closed were leased and thus were included in our statistics. Only time will tell if the significant closings in the third quarter will affect other tenants in malls and shopping centers. Some landlords have indicated that they have redevelopment plans underway for these closed stores which could stave off further vacancies.

As for the neighborhood and community shopping center numbers, we had reported last quarter that most of the Toys “R” Us stores closed in the second quarter and that things would settle this quarter which proved to be accurate. We still believe that most of the negative net absorption is behind us. Although, we do not expect the vacancy rate to improve significantly in the near future, nor do we expect rent growth to increase above the lackluster rates seen over the last few quarters.

In short, the retail sector is still correcting. The growth of e-commerce has rendered a number of older retailers obsolete. Other retailers have survived only after developing an omni-channel approach to selling that includes an online presence. Proprietors that have added entertainment options and/or overhauled food and restaurant offerings to their properties have helped maintain foot traffic that their tenants need to survive. While there are a few new construction projects in the pipeline, a number of obsolete shopping centers have sold as development sites. We expect to see more conversions, demolitions and major renovations as this sector continues to adapt to the changes induced by e-commerce.
emphasis added

Click on graph for larger image.

This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.

In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

Recently both the strip mall and regional mall vacancy rates have increased from an already elevated level.

Mall vacancy data courtesy of Reis