Despite Steady Q2, 'Darker Clouds Ahead' Predicted for Retail

Retail properties held steady through the second quarter of 2020, but vacancies are likely to increase and rents poised to fall as the pandemic continues to severely impact the retail industry, according to a new analysis.

Barbara Byrne Denham, a senior economist in the research and economics department at Real Estate Information Services—a branch of Moody’s Analytics—wrote in a report that the retail sector will absorb nearly 46 million square feet in 2020, and another 11 million square feet the following year.

“This will push the vacancy rate to 12.6% at the end of 2020. Rent declines are forecasted to decline a total of 8.1% (asking) and 11.2% (effective) by the end of 2020,” Denham wrote. 

The report said that those “stark numbers reflect a market that had already been on the decline,” adding that pandemic is certain to disproportionately hurt the retail industry compared to other sectors “given the already shaky ground that the sector had been on. 

“Even as the economy reopens, many will maintain social distancing, particularly in restaurants that can sustain outdoor dining operations for only so many warm weather months,” Denham wrote. “Even beyond the next few quarters, social distancing could remain in our subconscious for months.”

The report found every metro region saw a decline in rent for neighborhood and community shopping centers, only 24 saw an increase in vacancies and all by less than 1 percent. Denham attributed that to mostly negative net absorption of retail space, pointing to 34 of the regions seeing positive absorption over the past quarter compared to 46 metros with negative net absorption.

Denham further noted that vacancy rates for malls went up by only 0.1 percent to 9.8 percent over the past quarter, a ten-year high, and that the average mall rent declined by 0.9 percent to $43.70 after those rents increased in recent years.

“Furthermore, anecdotal reports suggest that malls will suffer more so than neighborhood and community shopping centers as older department store anchors are closing in droves,” she wrote, pointing to Macy’s announcement that it would shut down 125 stores this year.

And Denham also noted that malls have leased more space to “experiential” companies, which are struggling due to shutdown orders issued over the pandemic, and therefore could lead to more vacancies.

“Now that a second surge of COVID cases is sweeping the U.S. and authorities are re-issuing social distancing measures, the retail market could continue to suffer over the next few quarters until a vaccine is developed,” Denham wrote. “While the $2 trillion CARES stimulus package helped many get through the last few months, without an extension of benefits many will lose their jobs permanently and more will cut discretionary spending which yield even darker clouds ahead for the retail sector.”