Retail vacancy rates remain steady in Q2

by Calculated Risk July 7, 2024 8:21 AM

Note: We mentioned apartments and offices in our newsletter: Moody’s: Apartment vacancy rate unchanged in Q2, office vacancy rate hits record high

From Moody’s Analytics economists: Apartment demand slowly recovering, office stress continues to be evident, retail remains strong despite bankruptcies, industry slows

Data for the second quarter of 2024 showed the retail vacancy rate remained stable at 10.4, maintaining a normal trend.Asking and effective rents both increased slightly by 0.2% to $21.79 and $19.07 per square foot, respectively. Consumer spending in the second quarter was lower than expected, with retail sales increasing just 0.1% in May after a 0.2% decline in April, falling short of the expected 0.3% increase. While lower-income consumers continue to struggle, the middle class is now facing financial difficulties and higher-income consumers are cutting back on luxury purchases. However, spending has not stopped, and consumers are planning to travel and go to concerts this summer, suggesting they are favoring experiences over things.

Current trends point to relatively slow construction activity for the remainder of the year.In the absence of significant new development, current shopping and neighborhood centers are turning to companies employing a smaller but smarter model to fill vacant storefronts. This approach sees major retail chains offering a limited assortment of products in more compact locations. The business rationale is to address declining revenue by reducing operating costs through lower rent, fewer staff, and less inventory, resulting in lower overall overhead and improved profit margins. This strategy has helped retail landlords fill vacancies created by recent bankruptcies, helping to stabilize vacancy rates.

This graph shows strip mall vacancy rates since 1980 (data prior to 2000 is annual).

The 80s saw overbuilding in the shopping mall sector despite rising vacancy rates, due in part to very loose commercial lending that led to the S&L crisis.

In the mid-2000s, mall builders, following in the footsteps of the “roof” housing boom, invested more in malls (with looser financing), which caused vacancy rates to rise before the recession began, then skyrocketed during the recession and financial crisis.

Vacancy rates have remained stable at high levels recently as online shopping continues to impact brick-and-mortar stores.