Here's Why Retail Real Estate Hasn't Shown Any Signs Of Recovery Yet

Storefront for Rent

Photo: By andy54321 on Flickr, via Buzzfeed

While other property types, like multifamily and office, have shown consistent signs of recovery, retail has yet to do so.Why is retail recovery lagging, and are there specific retail subsectors that are bucking the trend and posting gains?

An uneasy standstill
It doesn’t matter which property types are examined: National numbers imply vacancies moored at levels unseen in at least a decade.

neighbourhood and community centre vacancy rates have been stuck at 11 per cent for the last two quarters, just 10 basis points shy of the 11.1 per cent all-time high record last observed in 1990.

Regional mall vacancies notched another slight increase in the third quarter, rising to 9.4 per cent, the highest level on record since Reis began tracking this property type in 2000.

Power centres are doing relatively better, with vacancies at 7 per cent as of the third quarter. This is a welcome decline from its cyclical high of 7.6 per cent back in the second quarter of 2010.

Still, power centre vacancies have to decline by more than 200 basis points before it approaches the mid-4 levels at which they hovered in early 2008, before the downturn gained steam.

Across property types, rent growth have remained close to zero or mildly negative, knocking rents back to levels last observed three to four years ago.

In contrast, multifamily vacancies have plummeted by 240 basis points since hitting a record high of 8 per cent at the end of 2009.

Office vacancies have climbed down at a much more modest pace, from a high of 17.6 per cent to 17.4 per cent in the third quarter, but absorption has been positive for four straight quarters, implying some positive activity in leasing.

Underlying causes
The reason why retail properties remain mired in their current debacle is two-fold. First, aggregate demand has remained weak, with economic growth and job creation relatively moribund.

While retail sales have posted some heartening trends over the last few months, this has yet to translate to appreciably greater demand for retail space from tenants.

On the supply side, retail properties are dealing with a glut that isn’t weighing down office or multifamily properties.

Inventory growth marched along at a relatively steady average of 1.6 per cent per year from 2000 to 2008, spurred along by the housing boom, which required the construction of retail outlets that complemented new subdivisions rising around the country.

In contrast, multifamily construction slowed from 2004 to 2008 because builders were busy putting up single-family homes; office inventory growth was also cut in half relative to its long-term average.

Supply for both sectors increased by only 0.4 to 0.5 per cent in the five years prior to the recession, less than a third of retail’s growth rate.

This post originally appeared at RetailTrafficmag.com.

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