Retail turmoil could last through 2011

Victor Calanog, director of research, Reis Inc.,

As published in Scotsman Guide's Commercial Edition, March 2009.

In October 2008's Property TypeCast, we noted that retail properties may be the sector of commercial real estate most affected by the current recession. Results from the fourth quarter of '08 confirm our dismal outlook.

Occupancy levels of U.S. neighborhood and community shopping centers deteriorated sharply in the quarter, pushing the overall vacancy rate to 8.9 percent for retail properties. The 50-basis-point increase is the largest single-quarter vacancy increase Reis has noted since it began publishing quarterly data in 1999. Larger properties, such as regional and superregional malls, experienced a similar decline in occupancy, with a 50-basis-point increase pushing vacancy levels to 7.1 percent, the highest level since Reis started tracking malls in 2000.

While asking rents showed 0.3-percent annual growth at year's end, effective rents fell by 1.1 percent in '08. This indicates a sharp increase in concessions throughout the year. Average asking rents at shopping centers fell by 0.4 percent between the third and fourth quarters, while effective rents dropped by 0.9 percent. These again are the largest single-quarter declines in asking- and effective-rent growth since '99, when Reis began publishing this data. At regional malls, asking-rent levels decreased by 0.3 percent.

What has caused these drops? Signs point to:

• Negative job growth, which the U.S. Bureau of Labor Statistics says has accelerated at a pace unseen since the early 1970s; and
• The plunge in retail spending, driven by eroding consumer confidence.

How can consumer confidence return? Job growth must turn positive, the housing market must stabilize and credit markets must ease. Unfortunately, all three conditions are still in flux. And even when they stabilize, we often observe a 12- to 24-month lag until commercial retail properties benefit from resumed consumer and retail spending.

Thus, we're projecting a continued increase in vacancy for neighborhood and community centers through 2011, unless conditions change dramatically. Asking- and effective-rent growth will be negative through at least 2010, with effective-rent growth trailing asking-rent growth because of concessions. With the International Council of Shopping Centers projecting store closures this year to match 2008's level, there appears to be little respite for landlords and tenants in the near term.

Victor Calanog, director of research at Reis Inc., writes a monthly column on property types for Scotsman Guide. As head of Reis' core economics team, he is responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at victor.calanog@reis.com. Faruk Ozdemir, team leader for Reis' quality-control team, contributed to this article.