Turns Out It’s a Small Mall World, After All
- Jan 12, 2008
For much of the year, commercial real estate held its own as the residential sector slid into despair. However, recent signs indicate commercial might be hitting a rough patch: And it’s starting at the epicenter of American excess–the shopping mall.
According to commercial real estate market research firm Reis Inc., the vacancy rate at shopping centers whose main resident was a big-box retailer or supermarket hit its highest level in 2007 in four years, Financial Week reports.
Like so many aspects of the housing decline, the rising commercial vacancies were something we probably should have seen coming. As the housing market boomed, shopping center developers quickly added new retail space–millions of feet worth–in hot housing areas like Phoenix, San Antonio, Texas, Cleveland and Tampa, Fla.
In fact, since 2005, developers have created more retail space than all office, apartment and warehouse space combined, according to The Wall Street Journal.
More residents means more shoppers, right?
Well, it does, if those residents have money to spend. Two years ago, they did–their mortgage payments might have been lower, before the rapid ARM resets set in. The unemployment numbers were lower; more of them were likely working.
And, of course, people had a ready supply of money whenever they needed it–all homeowners had to do was cash out some of their home’s rapidly rising equity and then it was off to Gap; Spencer Gifts, here we come.
It’s a different economic climate today. Homes have less value and equity and foreclosures are soaring. Consumer credit use is up–credit card debt soared to a six-month high in November–indicating cash is tight.
Even the usually lucrative holiday season was a bust this year–sales fell short of the retail industry’s already low expectations, indicating the much-feared drop-off in consumer spending had arrived.
As it turns out, we didn’t need all those new stores. Someone just forgot to tell the commercial construction industry.
Even as things began to slow, as in the housing decline, there was a disconnect between the finished retail projects that were finding it hard to fill space with renters and planned projects–so builders just kept on buildin’. In Phoenix, 9.3 million square feet of new retail space was built in 2007. Another seven million is on its way.
But the city has experienced some of the worst home sales and price declines in the country–so its retail vacancy rate is expected to double by mid-2008, according to Property & Portfolio Research.
Retail property values–which, like housing values, rose by a double-digit amount in 2005–are also expected to drop over the next three years.
If this all sounds really familiar, it is. And, exactly like the housing decline, the U.K. now is starting to feel the squeeze.
The world’s biggest shopping center owner, Westfield Group, called off plans to sell A$700 million ($611 million) of U.K. and New Zealand assets, which included the remaining third of the U.K. Shopping Centre Fund and the sale of two New Zealand shopping centers.
The reason: No one wanted to buy any of it.
Westfield sold stake in six of its 120 malls in 2007. One large buyer–Centro Properties Group, who snapped up $500 million of assets–said in late December that it might need to offload properties to fund debt, Bloomberg reported.
U.S. home mortgage loan defaults have increased all borrowing costs and prompted 70–or more–U.S. mortgage companies to falter, according to Bloomberg.
The subprime market is a scary place, and even though commercial property was long thought to be more secure than residential, it seems investors are questioning if anything is safe anymore.
Unfortunately, malls aren’t the only victims. Join us Monday for a look at other types of commercial properties that are facing high vacancy rates and decreased construction rates–and find out what’s scaring investors away from these previously hot projects.