One Property Type Hasn’t Benefited from the Recovery. Here’s Why

What's holding the market back?

As a property type, retail doesn’t seem to have benefited from the recovery quite as much as the others. What’s holding the market back? In its latest retail market report, released on Tuesday, Reis senior economist Ryan Severino addressed that question. E-commerce is gnawing away at brick-and-mortar, he noted, but that isn’t enough of a loss to account for the larger retail malaise. A bigger challenge, he said, comes from the proliferation of different retail subtypes over the last two decades. The rise of power centers, lifestyle centers, town centers and even outlet centers has siphoned demand away from more traditional retail subtypes—neighborhood and community centers and larger malls especially.

There’s still an overhang of new-ish space, in other words, left over from the development boom of the 2000s. In the second quarter of 2015, according to the Reis report, the national vacancy rate for neighborhood and community centers didn’t change from the previous quarter, coming in at 10.1 percent. Net absorption of this kind of retail space did in fact exceed supply growth during the quarter, but not by enough to knock vacancies down. The vacancy rate for mall also didn’t budge, coming in at 7.9 percent. Rent growth was up slightly for neighborhood and community centers, and up 0.6 percent for malls, so there’s been some improvement for landlords in that subsector. Even so, it’s been a sluggish recovery on the whole.

There’s also considerable evidence of bifurcation within the various subsectors of retail properties. That is, relative winners and relative losers. “High-end malls had a good run, but vacancies in those centers have largely disappeared,” Severino said. “Demand in the remainder of the subsector has been much slower to recover. Obviously, the lack of income growth has been a problem for these middling malls. They also face more competition from some of the newer retail subtypes that have flourished over the last two decades.”

Looking ahead, the key sticking point for the lagging parts of the retail real estate business—indeed, arguably further growth for the entire economy—is sustained income growth. It’s good that there are more jobs now; it’s good that the price of gas is lower than it used to be; and it might even be good that capital’s pouring into the safe haven of the United States from more jittery parts of the world. But until income rises in a meaningful way from most consumers, most retail sectors going to be hard pressed to grow.