“Overbuilt and underdemolished.”
That’s the blunt assessment of the state of retail real estate, according to real estate data and analytics firm Reis.
The glut of space – the national vacancy rate is 10 percent – is a result of the lingering impact of the recession and the effects of e-commerce and digital commerce on retail sales, among other factors.
Reis expects the vacancy rate to continue a slow downward trajectory, reaching the 9 percent range by the end of 2017. But even with the decrease in new construction activity, the vacancy rate will remain elevated.
“The retail sector is having trouble getting back,” said Michael Steinberg, Reis senior analyst. “Looking out four or five years, we don’t see the vacancy rate getting lower.”
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Andrew Graiser, co-president of A&G Realty Partners, which works with brands and retailers on maximizing their real estate assets, including acquisitions, dispositions, due diligence, lease renegotiations and lease renewals, agreed. “At the end of the day, traffic is down at the mall and it’s definitely creating an impact,” he said. “Some retailers are really in trouble, some are doing healthy housecleaning, some have too many stores in a market and some are combining bricks-and-mortar and omnichannel. That’s going to continue for a while.”
Prior to the economic downturn, at the end of 2007, the national retail vacancy rate was 7.5 percent. “It’s still pretty significantly elevated,” said Steinberg said, noting that at its height, in the third quarter of 2011, the vacancy rate was 11.2 percent.
Not surprisingly, the growth of e-commerce is having the reverse effect on industrial real estate. “The Amazons of the world are turning to large industrial spaces for distribution centers as they expand and build out same-day delivery capabilities,” Steinberg said.
Between 2014 and 2017, Reis expects about 34 million square feet of new retail supply to hit the market. That’s almost more than the total new stock that’s been added to the market since 2009. During 2000 and 2007, it wouldn’t have been uncommon to see that level of new development in a single year.
Graiser predicted more contraction for apparel retailers. “You’ll see more apparel closures across the board,” he said. “There might be a couple of [apparel] bankruptcies on the horizon.”
There could be closings in the restaurant sector as well, “which is growing incredibly fast,” Graiser said. “Anytime something grows that fast I have a little bit of concern.”
High-end malls that survived virtually unscathed by the recession are somewhat insulated from the vagaries of the economy. Consumers of luxury brands “want the shopping experience and want to interact with the sales reps,” Steinberg said. “As a result, it’s been a little more robust for malls at the higher end.”
Graiser said that could change. “Some of the luxury brands are going to start doing some consolidating. With the dollar being so strong, anything that has to do with an international shopper is impacted more than it was a year ago.“
Traditional strip malls and centers that cater to nondiscretionary-spending consumers, such as grocery-anchored projects are at risk. “There’s excess retail real estate inventory there,” he said.
And the vast middle is problematic. “That’s where there’s a lot of excess supply,” Steinberg said, citing shopping centers anchored by Sears as an example. “That middle ground that hasn’t found a place in the postrecession economy is more heavily impacted by economic [fluctuations]. Dollar stores are caught in the crosshairs of e-commerce.”
Steinberg sees no easy fixes. “Overconstruction and e-commerce has hindered the retail real estate market,” he said. “There’s not going to be a rapid change.”