Retail rents, vacancies meet expectations -- unfortunately

Victor Calanog, director of research, Reis Inc.

As published in Scotsman Guide's Commercial Edition, February 2010.

The deterioration of retail rents and occupancies continued unabated in the second half of 2009, as we discussed in October 2009's column. The same was the case for neighborhood and community shopping centers in the third quarter of the year, albeit at a slower pace.

Let's start with rents. Asking- and effective-rent growth only turned negative in the second quarter of 2008 for asking rents and in the third quarter of that year for effective rents. This past third quarter, however, asking rents are back down at mid-'07 levels, and effective rents have decreased to a level unseen since mid-'06. And this for a traditionally stable property type.

Negative net absorption of 5.3 million square feet in the third quarter does represent less loss of occupied space than the more than 8 million square feet logged in each of the first two quarters of '09. But retail completions have slowed to a trickle, with less than 600,000 square feet of strip-mall space coming online in the quarter.

Deterioration also was pervasive for larger malls this past third quarter. Vacancies increased by 20 basis points from the second quarter of '09 to hit 8.6 percent, the highest level since Reis began tracking regional malls in the first quarter of 2000. Asking rents for large malls decreased by 0.6 percent in the third quarter, the fourth-straight quarterly decline — and the first such streak in almost 10 years of quarterly history that Reis has observed. The year-to-year decline of 3.5 percent also is the largest annual deterioration on record.

These statistics are in line with Reis' expectations, given the pressure continuing to assail consumers and businesses. In the second quarter of '09, Reis projected asking-rent declines of more than 2 percent and effective-rent declines of more than 4 percent for 2009. Year-to-date figures track closely with those projections.

Although signs point toward the technical end of recession, continuing job losses and inconsistent consumer-spending patterns will weigh on retail properties for at least another 18 to 24 months. Reis continues to project increasing vacancy levels and negative asking- and effective-rent growth for neighborhood and community retail centers through 2011.

We have yet to observe any unexpected, systematic resumption in hiring and consumer-spending strength that might lead to revised, more-optimistic projections.

Evidence from the economy generally agrees with our outlook, based on third-quarter data. The U.S. Department of Commerce reported that monthly retail sales decreased 1.5 percent in September, though they've shown growth in the fourth quarter. Excluding auto sales, which the expiration of the government's "Cash for Clunkers" program affected, a number of retail sectors posted slightly positive sales growth for September. Retail sales are still rather low, however, and how they play out after the holiday season could provide a telling sign as to where the economy is headed.

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. Ryan Severino, lead economist for Reis' economics department, contributed to this article.