Shoppers walk through an almost empty Palisades Center Mall retail mall in West Nyack, New York, February 3, 2021.
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If you have recently noticed darker windows and empty shops in the mall, you are not alone.
The vacancy rate for regional malls in the United States hit a record 1
That increase of 90 basis points marked the highest the company has ever seen, surpassing the record by 80 basis points in the first quarter of 2009, in the thick of the Great Recession.
“Shopping malls are definitely still on the ropes,” said Victor Calanog, head of commercial real estate at Moody’s. “They were on the ropes even before Covid … It’s almost fitting now to say we have a record free space for malls because we’ve broken that record all year.”
According to commercial real estate services firm Green Street, the United States has about 1,000 malls. Moody’s tracks about 700 of them for analysis.
Shopper traffic to many closed malls, often located in the suburbs, has declined steadily over the years as Americans spent more online. This pattern was only accelerated by the global health crisis. Many of the retailers within malls, including department stores, have increasingly struggled to stay relevant with their customers. Last year, several mall-based businesses – including JC Penney, Neiman Marcus, Lord & Taylor, Brooks Brothers and J.Crew – looked at bankruptcy protection.
While other commercial real estate sectors such as apartment buildings are showing better progress, retail is still the most pressured, Moody’s found in its latest quarterly report.
Industrial property has been the most resilient type of property, where the demand for stocks that store goods and fulfill e-commerce orders is rising. Rents for warehousing and distribution properties across the country have so far not turned negative during the pandemic, Calanog said.
Office space, such as retail, continues to see increased vacancies and declining rents. Many companies are still struggling with what the future of the work area will look like. Companies are considering removing their footprints in the office and letting employees embrace working at home, at least part of the time.
Forty-eight of the 79 U.S. metro areas that Moody’s tracks have suffered effective office rental declines in the first quarter. Among the hardest hit areas was Charleston, South Carolina, down 3.5% quarter-on-quarter; New York, down 1.8%; and San Francisco, down 1.6%.
In the retail sector, 40 of the 77 metros recorded a decline in effective rents in the first quarter, Moody’s noted. Here, retail is only representative of neighborhood centers and not shopping malls, the company noted.
The vacancy rate for these retail properties (again, excluding shopping centers) was 10.6% in the most recent period, up slightly from 10.5% in the fourth quarter.
“There is an ongoing balance between store closures versus openings,” Calanog said of the retail industry. “We want to be fair, there are companies opening stores … But right now we’re losing space, and that’s what the data reflects.”
Retail store growth today has largely been concentrated in the off-price and discount area, with companies such as Dollar General, Lidl, TJ Maxx, Burlington and Five Below planning major expansions. Beauty companies Ulta and Sephora are also still opening stores and expect a strong reband after the pandemic in visits to brick stores.
But that growth will not always be enough to offset maturity elsewhere.
In a separate report released this week, UBS predicted in a base case scenario that there will be around 80,000 closures of retail stores nationwide over the next five years, affecting approx. 9% of all retail stores. Clothing, sports equipment and office supplies are expected to lead to a large proportion of closures, UBS said.
It counted 115,000 malls – a number that includes strip malls, malls, outlets and other lifestyle centers – across the United States at the end of 2020 against 112,000 in 2010 and 90,000 in 2000.
– CNBCs Nate Rattner contributed to this data visualization.