Calculated Risk 2024/07/07 08:21:00 AM
Note: Newsletter covers apartments and offices: Moody's: Apartment vacancy rate unchanged in Q2, office vacancy rate hits record high
Economists at Moody's Analytics say demand for apartments is gradually recovering, stress in offices continues to be evident, retail is strong despite bankruptcies and industrial is cooling.
Data for the second quarter of 2024 shows retail vacancy rates remaining steady at 10.4%, maintaining a normal trend. Asking and effective rents both increased slightly by 0.2% to $21.79 and $19.07 per square foot, respectively. Consumer spending in the second quarter was below expectations. After a 0.2% decline in April, retail sales increased only 0.1% in May, falling short of the expected 0.3% increase. The middle class is now facing economic difficulties while lower-income consumers continue to struggle, and higher-income consumers are refraining from luxury purchases. However, spending has not stopped. Consumers plan to travel and go to concerts this summer, showing a preference for experiences over goods.
Current trends point to a relatively slow construction activity for the remainder of the year. In the absence of significant new developments, current shopping and neighborhood centers are turning to companies employing a smaller but smarter model to fill vacant storefronts. This approach sees major retail chains offering limited product lineups in more compact locations. The business rationale for this is to address declining revenue by reducing operating costs through lower rental costs, reduced staff numbers, and reduced inventory, resulting in lower overall overhead and improved profit margins. This strategy has helped retail store owners fill vacancies created by recent bankruptcies, helping to stabilize vacancy rates.
This graph shows strip mall vacancy rates since 1980 (data prior to 2000 is annual): The 80s saw overbuilding in the mall sector despite rising vacancy rates, due in part to very loose commercial lending that led to the S&L crisis.
In the mid-2000s, mall builders, following in the footsteps of the “roof” housing boom, invested more in malls (with looser financing), which caused vacancy rates to rise before the recession began, then skyrocketed during the recession and financial crisis.
Vacancy rates have remained stable at high levels recently as online shopping continues to impact brick-and-mortar stores.