The retail sector’s struggles intensified in the third quarter.

According to Moody’s Analytics REIS, the sector’s vacancy rate increased by 0.2% in the quarter to 10.4%, which was the highest mark since 2013. Average asking rents and average effective rents fell 0.1% and 0.4%, respectively. 

Vacancies in malls hit their highest rate in 20 years, after rising 0.3% to 10.1% in Q3. The average mall asking rent declined 0.7% in the quarter and 0.6% over the year. 

“These declines seem tepid given the state of the retail market in which retail sales have somewhat recovered from the abyss of March, but many consumers have been hesitant to shop indoors. Restaurants had better business over the summer than in the spring, but some indoor dining restrictions will hurt business as the weather gets colder,” wrote Barbara Denham, senior economist, Research and Economics at Moody’s Analytics REIS.

For neighborhood and community shopping centers, the quarter’s net absorption was negative 2.63 million square feet following negative absorption of 894,000 square feet in the second quarter. Asking rents and effective rents declined 0.1% and 0.4%, respectively, according to Moody’s Analytics REIS.

Construction was 651,000 square feet in the third quarter, which was just below the previous quarter’s 667,000 square feet. Construction in both quarters fell below the average new supply of 1.7 million square feet per quarter in 2019 and 2.5 million square feet built per quarter in 2018.

While Q3 showed negative trends, retail and restaurant sales did rally over the summer, adding $121.8 billion to the economy through July, according to the Census Monthly Retail and Food Services Sales. In March and April, sales plummeted $114.5 billion or 22% from February. Still, total retail and restaurant sales from January through July were down 0.8% year over year.

Nonetheless, retail landlords have suffered through the pandemic as mass closures across the country pushed major retail tenants into bankruptcy. 

Recently REITs CBL & Associates Properties and PREIT, which have exposure to the mall product, filed for voluntary bankruptcy. Both REITs announced plans to recapitalize and restructure debt as part of the bankruptcy process. 

In October, Trepp pinpointed about $3.9 billion in almost 100 outstanding CMBS loan balances, where the borrower has indicated a willingness to turn over the asset to the lender. Regional malls represent more than one-quarter (26%) of loans where borrowers could hand the keys back to lenders.