Shopping mall vacancy rates rose to 9.1% in Q3 2018, up from 8.6% in Q2 and 8.3% in Q3 2017. This is the highest vacancy rate since Q3 2011, when it crept up to 9.4%, according to a report from Reis, a real estate analytics firm. Retail vacancies overall remained flat at 10.2%.
The vacancy totals aren’t surprising when considering various factors. There’s the obvious continued consumer shift to e-Commerce spending, which Reis highlights in the report. Additionally, as many as 30% of malls will need to close due to the oversaturation of shopping centers in the U.S., estimates Coresight Research. There is approximately 24 square feet of commercial retail space for every American, compared to only 5 square feet per person in the UK, 3 in China, and approximately 2 in Germany, according to an A.T. Kearney report,The Future of Shopping Centers.
Then there’s the poor performance of anchor stores over the years. Department store closings from Bon-Ton Stores and Sears in Q3 accounted for much of the jump in the mall vacancy rate, according to Reis. However, a number of owner-occupied Sears stores were excluded from the data, since they don't have leases.
“Bankruptcies such as Bon-Ton’s will impact all types of locations indiscriminately, but surviving department stores will implement closure programs selectively,” said Deborah Weinswig, Founder and CEO of Coresight Research in an interview with Retail TouchPoints. “Those programs are likely to have a bigger impact on lower-traffic regional malls with lower sales densities than on premium malls — although retailers may opt to reduce the size of their expensive flagships, too.”
As mall vacancies continue to increase, there will be a bigger distinction between premium malls (often referred to as “Class A” malls) — and the lower-trafficked malls (usually classified as “Class C or D” malls). The Class A malls constitute just 20% of the market, but they account for nearly 72% of all mall sales, according to data from Green Street Advisors. Class A malls typically see sales per square foot exceed $550, while B malls range from $550 to $400, C malls range from $400 to $325, and D malls range average out below $325, according to Podell Real Estate Advisors.
If there’s one positive outcome of the increased vacancy rates, average rent has decreased by 0.3%, which could help retailers looking to expand their physical presence. Additionally, non-retail entities are moving into some of the vacant mall spaces, such as entertainment centers, personal care services, medical clinics or fitness centers. Non-retail/non-restaurant tenants occupied 13.3% of space in regional malls as of early 2017, up from 10.5% in 2012, according to the International Council of Shopping Centers (ICSC).
The average rent for malls fell from $43.36 per square foot in Q2 2018 to $43.25 per square foot in Q3, according to Reis. The last time rents slid on a quarter-over-quarter basis was in 2011.
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