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US Shopping Center Demand Falls to Six-Year Low as Net Absorption Declines and Store Closures Pile Up

Las Vegas, Other Growth Markets Seeing 'Green Shoots,' But Retail Vacancies Expected to Rise Through Rest of 2018
May 8, 2018
Demand growth for mall and shopping center space by retailers fell to its lightest level in six years in the first quarter of 2018 as retailers continued to focus on their top-performing locations and shed marginal stores, with announced store closures totaling nearly 100 million square feet so far this year alone.

The balancing act was reflected in the first quarter 2018 U.S. retail vacancy rate, which at 4.6% was unchanged from the fourth quarter of 2017 and just a 10th of a percentage point lower than a year ago.

Net absorption of U.S. retail space fell to 11 million square feet, the lightest quarter for mall and shopping center demand since 2012, according to data presented today during CoStar's First-Quarter 2018 State of the U.S. Retail Market report.

"As the national retail vacancy rate has begun to flatten, the pace of the recovery has slowed. In fact, we can actually call an end to the recovery," said Ryan McCullough, senior managing consultant for CoStar Portfolio Strategy, who co-presented the report with Director of Research Suzanne Mulvee.

While retailer demand for store space has slowed, it has not stopped, contrary to perceptions in the broader market fueled by headlines of closures and bankruptcies of big-box tenants like Kmart and Toys R Us.

In particular, expansions by restaurants, grocery stores and other food-focused retail tenants, as well as health-care and other service providers and smaller local shopping center tenants, continues to drive leasing and net demand growth for the retail sector, McCullough said.

The retail property market is performing differently in different parts of the country. In recovering housing markets and other high-growth Sunbelt metros, retail vacancy has continued to decline and post strong leasing momentum.

That includes Las Vegas, where an estimated 37,000 commercial real estate pros are expected to gather in about 10 days for ICSC's RECon, the retail industry's largest convention. Glitter City posted average retail rent growth of nearly 6%, well above the national average, which has declined from 2.9% to 2.1% over the past year.

Conversely, demand has softened in core coastal markets where high quality, new space is tough to find, McCullough said.

"The most damaged markets are healing the fastest, with demand growth growing fastest in higher vacancy markets and markets with the healthiest fundamentals seeing the least expansion," added McCullough.

Net in-migration in these markets has produced the kind of population, job and income growth that creates ready-made consumers and drives retail spending, said CoStar's Retail Research Director Suzanne Mulvee.

"Phoenix for example, has seen population growth at three times the national average in recent years," McCullough added. "It was overbuilt before and after the recession, but it's getting healthy quickly" as a result of the recent population growth.

If demand and retail construction remain at their current muted levels as expected, the U.S. retail vacancy rate may edge up over the balance of the year, McCullough said.

What those attending the upcoming retail industry conference at the Las Vegas Convention Center later this month must address is the 95 million square feet of store closures announced so far this year, on pace to easily surpass last's year's total of 105 million square feet of stores announced as going dark.

Toys R Us accounts for more tha 40 million square feet of the dark space announced in 2018, followed by 20 million square feet slated for closure by Bon-Ton Stores, Inc. Sam's Club, Kmart, Sears, Macy's and Winn-Dixie make up the bulk of the remaining closing space.

CoStar's Mulvee and McCullough, however, see the contraction as a necessary byproduct of nearly two decades of heavy shopping center and mall construction in the U.S.

"There's additional pressure from e-commerce, but we believe the biggest source of pain in the market is oversupply," Mulvee said. "Every time one of these stores closes, it helps correct the supply/demand imbalance and improve comparable retail sales."

Despite a perception that malls are the main victims of the closures, Mulvee noted that less than half of the total square footage announced to date in 2018 as being closed is actually located in a mall. The balance is in other types of retail centers, Mulvee added.

Randyl Drummer, Senior News Editor  CoStar Group   

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