As COVID-19 Strikes Retail, Shopping Centers Hit Recession-Era Levels of Reabsorption

The US outdoor shopping center market recorded its largest return of space since 2009 during the second quarter of 2020, with 12.2 million square feet reabsorbed so far this year according to a new report from Cushman & Wakefield.

The report said despite the -7.7 million square feet absorption during Q2, “the impact on vacancy and rents has thus far been moderate.” It noted that overall vacancy rates went up by 20 basis points over the last quarter to hit 6.8 percent, and the overall asking rent for all space classes is at $17.58 per square foot, holding steady from the previous quarter.

The report found that the pandemic is impacting different kinds of properties and commercial retail spaces differently: Power centers—which typically feature big-box stores—as well as strip malls and neighborhood and community centers were the most stable shopping center types. Their vacancies centered around Class B and C spaces, and the report said the higher rents for Class A vacancies “is likely lifting overall asking rents.”

Cushman & Wakefield highlighted power centers, “which have benefited from a tenant mix of retailers deemed essential and allowed to remain open” as “the only shopping center type to remain in growth mode.” Vacancy rates at those centers have remained about the same at 5.7 percent, while both strip and neighborhood/community centers saw increases.

The report also found that leasing velocity has decreased for all retail categories and commercial spaces, but the downturn has hit apparel stores and small businesses the hardest.

“For some within these sectors, the pandemic has amplified challenges and made turnarounds more difficult. For retail real estate, this will translate into a near-term headwind to leasing activity at malls, urban high street, outlet and lifestyle centers,” the report reads.

The Cushman & Wakefield analysts found restaurants, bars, health clubs and beauty salons—which have been subject to restrictions adopted to combat the spread of COVID-19—are the small businesses in retail that face the most challenges.

The report notes those businesses typically lack access to resources needed to offset shutdowns and decreased sales, and assistance offered through the Paycheck Protection Act “is not indefinite.”

“The promise for those capable of navigating through the liquidity crunch is that these categories were among the most popular with consumers pre-pandemic and consumer demand is expected to rebound in tandem with improved public health and economic conditions,” the report reads. “How quickly public health improves and if it can be sustained remain the biggest unanswered questions for determining the pace of economic and retail recovery.”

The report also highlighted retail data showing some rebound in sales, but said “it remains to be seen whether the uneven recovery path and concerns about rising virus cases in some U.S. states will temper confidence and weigh on spending in the months ahead.”