With the additional closings of Sears and Bon-Ton department stores, the third-quarter U.S. mall-vacancy rate hit its highest level in seven years — but don’t sound the alarm bells about the state of brick-and-mortar retail.
Thanks to those store closings, the Q3 vacancy rate in enclosed regional malls jumped to 9.1%, the highest rate since Q4 2011, according to real estate research firm Reis in a study released Wednesday.
That was up from 8.6% in Q2, when store closings from other merchants including J.Crew, Abercrombie & Fitch and Lord & Taylor again pushed the mall vacancy rate to a multi-year high.
As vacancy rates ticked up, the Q3 average mall rent dipped 0.3% from Q2 to $43.25 per square foot, the first such decline Reis said it’s seen since 2011.
However, behind what seems like yet another worrying signal of the state of brick-and-mortar retail, there are plenty of other comforting signs. Yes, the U.S. is still overstored with higher per-capita shopping square footage than many other developed countries. And many so-called B, C and D class malls, often in less desirable locations and home to less coveted tenants with lower sales per square foot, haven't fared well; some won't survive without complete makeovers.
But as losing malls are being weaned out, top-tier A malls are more coveted than ever. Some are being redesigned and expanded to outfit hotels and apartments to become mixed-used lifestyle centers. On the traditional retail floor inside those malls, replacing some department stores and specialty clothing mall tenants are online-born brands such as Casper and UNTUCKit. They join Apple, Tesla and grocery stores like Wegmans, gyms, coworking spaces, movie theaters and restaurants like Shake Shack that have increasingly become malls' new traffic drivers.
Mall owner Macerich, for instance, said in August that it's partnering with coworking space operator Industrious to design coworking spaces in some of its properties. In January, its Scottsdale Fashion Square mall in Arizona will be the first showcase of that partnership. At Minnesota’s Southdale Center, controlled by No. 1 U.S. mall owner Simon Property Group, fitness chain Life Time is opening Life Time Work to include coworking space so people can exercise, work and shop.
“Demand from tenants for space in our highly productive centers is increasing,” David Simon, Simon's chairman and chief executive, said in the company’s most recent earnings call, in July.
Retail sales per square foot at Simon's properties, from King of Prussia in Pennsylvania to Fashion Valley in California, rose 4.6% to $646 in the trailing 12 months ended June 30, Simon Property said in July. The occupancy rate at the end of June was nearly 95%.
According to Reis, the average U.S. mall rent in each of the past four quarters through the end of September had risen to at least $43, the highest level since at least 2000. Over the past 10 years, the average mall rent has cumulatively increased 6.5% from $40.62 per square foot in Q3 2008, the peak rate in the last market cycle, Reis said.
Simon, with top-tier mall properties, said its base minimum rent per square foot rose 3.3% to $53.84 at the end of second quarter from a year earlier.
Outside of malls in open-air and community shopping centers — representing the bulk of U.S. retail real estate and including strip malls and the trending lifestyle centers — a net 2.3 million square feet of real estate space was occupied in the third quarter, Reis data shows. That reversed the downbeat trend in the second quarter, when Toys “R” Us store closings led to 3.8 million square feet of space being vacated, the first time since at least 2013 that open-air shopping centers saw more space emptied than occupied.
Meanwhile, as Toys "R" Us stores emptied, others wanted in. For example, Kimco Realty Corp., a major open-air shopping center developer that owns some vacated Toys "R" Us locations, said in July that it's seen "significant" releasing interest from major retailers and off-priced furniture, fitness, specialty grocery, and arts and crafts retailers.
While the Q3 U.S. open-air retail space vacancy rate was unchanged at 10.2% from Q2, the national average asking rent and the “effective rate,” which excludes concessions landlords give to tenants, both edged up 0.4% from the prior quarter, Reis said. Year-over-year, both rates were up almost 2%, to $21.11 and $18.48 per square foot, respectively. That marked the highest level for both measures since at least 2013, according to Reis, which studied 77 primary metro markets, from San Francisco and Seattle to Raleigh-Durham and Boston.
As for the new occupants Reis observed in the space last quarter? Count trampoline parks alongside gyms, furniture and houseware stores and grocery stores. The transformation of brick-and-mortar retail is far from over.
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