Store closures and bankruptcies have combined to send retail vacancies soaring upward and rents spiraling downward for the better part of two years. Observers are betting that stability could begin to return to the retail real estate market in 2010.
For the fourth quarter of 2009, the vacancy rate at U.S. neighborhood and community shopping centers stood at 10.6 percent, up 30 basis points from the previous quarter and an 18-year high, according to commercial real estate research firm Reis Inc. The vacancy rate at regional and superregional malls, meanwhile, was at 8.8 percent, up 20 basis points from the third quarter, and the highest figure Reis has recorded since it began tracking the metric in 2000.
In the fourth quarter, asking rent for neighborhood centers fell 2 percent to $19.13 a square foot compared with a year ago. Asking rents at regional and superregional malls fell 0.4 percent to $39.03 a square foot.
“Retail real estate was in the crosshairs of this recession,” said Reis economist Ryan Severino. He said the twin pressures of slowed consumer spending and what he views as an overabundance of supply weighed heavily on the sector through the recession.
Most analysts and economists said the tide should begin to turn in 2010, although they tempered their optimism with caution that the recovery will come in fits and starts.
Michael Niemira, chief economist at the International Council of Shopping Centers, said the group expects to see overall shopping center vacancy rates peak in early 2010.
“The industry is still not growing,” Niemira said. “The rate of contraction has slowed, but the improvement is still wanting.”
According to the ICSC, the number of announced store closings in the U.S. peaked at 6,913 in 2008, and fell to 4,763 in 2009, closer to the 2007 level of 4,603. Niemira said a recovery in retail-sector sales was evident by September 2009 and picked improvement in demand as a “story” for 2010.
“I think we started to see a switch in the story line,” Niemira said of 2009. “The weakness we’ll [now] see is the slowness of store openings.”
Rich Moore, real estate analyst for RBC Capital Markets, agreed 2010 will prove to be a turning point. He said he’s expecting a “positive year, but a transition year” for retail real estate and that traffic has been up particularly at better centers. He added that retailers typically look ahead three years when it comes to property, so those in a position to may soon be preparing for a full-on recovery and fueling demand.
John Perry, head of U.S. real estate equity research at Deutsche Bank, said he expects landlords will have fewer store closings and bankruptcies to contend with in 2010. He added that thawed credit markets will allow those retailers that do face bankruptcy a better chance at debtor-in-possession financing and better odds of fending off liquidation. Perry did stress that retail rents have yet to bottom out.
“They could go lower and, according to our early estimates, we’re assuming they will,” he said.
At Reis, Severino also expects the decline in rents to continue. On the whole, the research firm has taken a more cautious outlook than others. Reis has said it expects continuing unemployment trends and inconsistent consumer spending to drag on retail properties for at least another 18 to 24 months.
“We do expect to see vacancies increase this year and asking rents to come down, effective rents to come down,” Severino said. He believes consumers won’t really feel comfortable spending again until they see significant improvement in the job market.
“That private side of the economy has to come back for things to turn around,” he said.