Non-mall shopping centers continue positive trend
Non-mall shopping center indicators continued to trend positive in fourth quarter 2018, according to Cushman & Wakefield’s U.S. Shopping Center Q4 2018 Marketbeat report.
The vacancy rate was 6.3 percent at the end of 2018, down from 6.7 percent at the end of 2017. Of the 66 markets across the United States tracked by Cushman & Wakefield, half registered vacancy at or below this level. Occupancy growth remained positive, but the pace has slowed. Nearly 6.2 million square feet was absorbed in the fourth quarter of 2018, bringing the year-to-date total to 24.9 million square feet. This compares to an annual average of 41.1 million square feet in each of the previous five years, according to Cushman & Wakefield.
Construction activity also has tapered with demand. A total of 18.2 million square feet was added to the shopping center inventory in 2018, half of which was among the neighborhood/community sector. As of year-end, only 14.4 million square feet of shopping center space was under construction across the United States. Several projects currently under way are focused on redevelopment and mixed-use projects, as will continue to be the case for future development activity. Neighborhood and community centers accounted for the majority of demand in 2018, demonstrating the resiliency of this sector with its composition of grocery and drug anchors combined with restaurants and positive absorption figure, according to Cushman & Wakefield.
The lifestyle center sector was also bolstered by development activity in 2018. Net absorption for lifestyle centers increased to 1.3 million square feet in fourth quarter 2018, bringing the year-to-date total to nearly 2.0 million square feet. The quarterly average was only 227,000 square feet through the first three quarters of the year. The swell of occupancy during the fourth quarter is primarily due to move-ins at newly completed development, particularly mixed-use projects, according to Cushman & Wakefield.
Despite continued closures of anchor stores affected by recent bankruptcy announcements, the power center sector rebounded from two previous quarters of occupancy losses, registering nearly 408,000 square feet of positive absorption in fourth quarter 2018. Total net absorption for power centers totaled 1.8 million square feet in 2018, primarily due to strong occupancy gains in the first quarter, according to Cushman & Wakefield.
Looking forward, while economic trends and 2018’s corporate tax cuts have bolstered most retailers, the basic underlying structural challenges faced by many retailers in certain categories still remain. With economic growth expected to continue well into 2019, the number of bankruptcies may diminish. This will give struggling retailers a short window in which to reinvent themselves and pay down debt obligations while right-sizing inventories and store portfolios. However, a weakening economy would exacerbate woes faced by struggling retailers and present even some of the healthier ones with new challenges, according to Cushman & Wakefield.
Class A properties will continue to outperform all other classes as the preferred locations for the strongest retail and restaurant concepts. Well-funded class B properties may begin reinvention while weak class B malls will continue to slide. While this will happen across all shopping center types, this trend will play out to a lesser degree among neighborhood/ community centers and power centers. Neighborhood and community centers will see continued solid performance from both class A and B properties, but power centers will gradually experience weakness among class B properties during the next few years as tenants increasingly see class B malls as an option, according to Cushman & Wakefield.
