The retail marketplace continues to undergo a period of retrenchment and reinvention, the likes of which we have not seen since the rise of the suburbs starting in the late 1950s. The new period of disruption has been fueled by the rise of e-commerce, in particular Amazon, with the emergence of smartphones and tablets acting as a major accelerator since 2010.
Combined with a consumer base that downshifted into frugality mode during the Great Recession, the current marketplace is one of the most challenging retail landscapes of the past 50 years.
In spite of these challenges, overall shopping center vacancy has actually continued to trend downward. Despite a significant increase in retail closures (through the third quarter Cushman & Wakefield has tracked over 4,000 major chain closures for 2016, surpassing 2010’s record of 3,600), as well as multiple notable bankruptcies, the disruption has not equally impacted all retail sectors.
Digital media has effectively wiped out the video and record store sectors while creating major challenges for the remaining major bookstore chains. The consumer electronics and office supplies categories continue to face major headwinds from e-commerce, as do a number of other retail categories ranging from gifts to home furnishings.
The latest challenges have been for the apparel and department store categories with Amazon forecast to become the largest retailer of apparel goods in the U.S. by next year. Yet, even as Wall Street continues to ratchet up pressure on retailers in that arena to cut store counts and boost their omni-channel presence, the impact of this trend has almost exclusively been felt at the nation’s malls. More specifically, department stores and apparel retailers are struggling in Class B and C malls, which account for only a small portion of the nation’s retail space.
While the nation’s inventory of major malls has decreased by about 200 over the past six years, roughly 125 of those were reinvented with new tenant mixes and/or significant redevelopment as other retail types.
Meanwhile, even while many retailer categories have been in contraction mode. This has been more than offset in the post-recession era by a number of sectors posting explosive growth, ranging from dollar stores to discounters, off-price apparel, grocery stores, automotive retail, service-oriented retail and restaurants.
None of this, however, is to suggest that the challenges facing the retail marketplace aren’t significant or that they are behind us. While vacancy edged down a notch this quarter, net absorption also slowed and has been on an erratic, and mostly downward overall trend for the past few years.
Most strikingly, following five consecutive years of rising rents, the average asking rent for shopping center space in the U.S. fell for the first time this quarter.
By the Numbers
Overall shopping center vacancy stood at 7.4 percent as of the end of third-quarter 2016, down from 7.5 percent three months ago and 7.8 percent one year ago. In terms of geographic performance, the Great Plains saw the greatest quarterly decrease in vacancy, with the current rate of 7.9 percent down from 8.3 percent in the second quarter, followed by the Great Lakes (9.6 percent down from 9.9 percent).
Regardless, the Great Lakes region still has the highest level of vacancy of any region in the U.S., followed by the Mountain (9 percent, unchanged from the second quarter) and the Great Plains. The regions with the lowest levels of vacancy are the Pacific (6.3 percent down from 6.5 percent last quarter) and the Northeast (6.3 percent up from 6.2 percent in the second quarter).
The Northeast was the only region to post increased vacancy levels this quarter, but declines overall were minimal. Vacancy remained stable in the South at 7.5 percent and fell slightly in the Texas South Central (7 percent down from 7.2 percent) and the Southeast (7.1 percent down from 7.3 percent).
The U.S. shopping center marketplace posted over 11.9 million square feet of occupancy growth in the third quarter. This is down from nearly 12.2 million square feet of positive net absorption recorded last quarter. In terms of occupancy growth, the Pacific and Great Lakes regions led the way (both recorded 2.4 million square feet) in the third quarter.
The Texas South Central (2.1 million square feet), Southeast (1.9 million square feet), Northeast (1.4 million square feet) and Great Plains (1.2 million square feet) followed. The Mountain (343,000 square feet) and South (200,000 square feet) regions posted the weakest levels of growth.
New construction accounted for over 7.1 million square feet of new shopping center space in the third quarter, just under 80 percent of which was occupied upon delivery. The Northeast and Texas South Central regions led the way with nearly 1.8 and 1.4 million square feet of new deliveries, respectively.
Virtually no new projects are moving forward without anchor commitments in place and, in most cases, significant pre-leasing of inline and pad space as well. Regardless, the development pipeline is shrinking. We are currently tracking 25 million square feet of new space under construction. This number is down from nearly 29 million square feet of space that was in the development pipeline one year ago.
Despite overall metrics that still mostly favor landlords, the average asking rent we are tracking for shopping centers fell from $21.79 to $20.43 per square foot on a net lease basis in the third quarter. We should note that as this metric includes space of all sizes across all shopping center types and classes, it is useful only as a benchmark. There are wide variations at the local level based on class, type and size. While a number of markets continue to see brisk leasing activity we are seeing lower levels of gross absorption in most markets.
We anticipate slightly positive occupancy growth in the fourth quarter, driven almost entirely by deliveries of new product where significant space commitments have already been made. However, we also expect the trend of closures to continue and for leasing of second-generation space to slow further. Vacancy levels are likely to remain flat or possibly increase by the end of the year. These increases will be minimal. However, our outlook for 2017 reflects a marketplace where the pendulum will likely move further toward the tenant side of transactions.
Though we anticipate a stronger holiday shopping season, with 3.7 percent sales growth compared to last year’s 3 percent total, the trend of closures will continue in 2017 and likely accelerate. There are a number of retailers Cushman & Wakefield is tracking that will need a phenomenal holiday season to survive into next year, and there are some others for which bankruptcy may already be an inevitability.
For the most part, however, this will just be a continuation of the trends we are seeing already in the marketplace. What is more challenging is the increasing weakness we are starting to see in some of the categories that have driven growth over the past few years.
Roughly half of all of the retail unit growth that we have tracked in the U.S. in the post-recession era since 2010 has come from restaurants. Prior to 2010, this category typically accounted for one-third of the total retail unit growth annually in
the U.S. But years of aggressive expansion from hundreds of concepts mean that the dining landscape is increasingly saturated. Though American consumers are eating out more than ever, restaurant closures are on the rise and will increasingly be an issue heading into 2017 and beyond. This sector isn’t likely to see contraction in 2017, but we are due for a shakeout with winners and losers emerging.
The same is likely to hold true for grocery stores. Look for new, smaller niche concepts to continue expanding while consolidation plays out among many traditional concepts, mostly those active with larger footprints. Meanwhile, the discounter, off-price apparel and dollar store categories each have varying degrees of runway left.
But after years of aggressive expansion we are already starting to see signs of market saturation for these players. These categories are also likely looking at a shakeout sometime in the next 12 to 24 months. The long and short of it is that many, if not most, of the categories that have been in expansion mode over the past few years are likely to slow growth ahead.
By Garrick Brown, Cushman & Wakefield’s vice president of retail research of the Americas. This article is an excerpt from Cushman & Wakefield’s Q3 2016 U.S. Shopping Center MarketBeat. Click here to view the full report.
Originally from here.