The fourth quarter of 2020 saw tepid declines in retail fundamentals that were seemingly out of step with the dire realities of the retail market nationwide, as COVID cases surged and every day brought news of another brand’s imminent bankruptcy or store closures. 

Research released by Moody’s Analytics REIS showed that despite a waning appetite for indoor shopping among consumers, the latest numbers aren’t as precipitous as you’d think. The firm’s outlook predicts that most of the decline in retail rents and increased vacancies will happen in 2021, a forecast bolstered by the expectation that many struggling brands may close in the wake of the holiday shopping season.  And while the recent stimulus measures will pump up consumer spending, cold weather and a new surge in COVID variants have already led to stricter shutdowns.

The retail vacancy rate increased to 10.5% in Q4, a slight uptick from 10.4% in the third quarter and the highest level since 2013, while mall vacancies also jumped another 0.4% to 10.5%, the highest level in more than two decades. New Orleans led the roster of metro areas with the largest increase in vacancy, followed by Providence, Albuquerque, Cleveland and Richmond. On the flip side, Rochester, Charleston, Fairfield County and Greenville were among those areas with the biggest decline in vacancy.

Average mall asking rents slumped 0.8% in Q4 and 1.8% over the course of the year, and Moody’s expects malls will suffer more than neighborhood and community shopping centers as they bear the ongoing weight of department store anchors closing and the slow struggle of “experiential” tenants like trampoline parks or entertainment companies to rebound in the wake of the COVID-19 crisis. Metro areas with positive effective rent growth during the fourth quarter include Boston, Greensboro/Winston-Salem, Tacoma, Rochester and Memphis, while areas with the biggest decline in effective rent were San Bernardino/Riverside, Denver, Fort Worth, Richmond and Indianapolis.

Net absorption, though dismal at negative 2.13 million square feet, was still an improvement over the lowest quarterly absorption of 4 million square feet in the second quarter of 2018. Of the 80 metro areas surveyed by Moody’s, 23 saw positive absorption, and 62 metros have a higher vacancy rate.  Seventy-six percent saw a decline in average asking rent over the year.

Average neighborhood and community shopping center asking and effective rents declined 0.3% to $21.34 per square foot and 0.4% to $18.61 per square foot, respectively, but 20 metro areas posted a rent increase while another eight saw no change. While construction in these types of centers dropped to 623,000 square feet in the fourth quarter (as compared to the previous quarter’s 874,000 square feet), both Q3 and Q4 put up numbers well below the average new supply built during the same periods in 2018 and 2019.  Fort Lauderdale, San Antonio, Dallas, Orange County, and Austin led the only eight metros that saw new construction in the quarter.

As retailer bankruptcies continue to stack up and the pandemic continues, Moody’s predicts even steeper declines in 2021, saying many retailers could get “crushed” with the surge in COVID cases. Retail and restaurant sales nosedived over the summer and into the fall and showed a year-over-over growth of a mere $1 billion, according to the Census Monthly Retail and Food Services Sales, and Moody’s notes that the steepest decline was in restaurants (decline of $123.7 billion year-over-year), followed by gasoline sales (down $68.1 billion) and clothing stores (down $61.5 billion). These trends are likely to continue at least in the near term, as e-commerce and online purchasing remain consumers’ shopping method of choice.  Already, many retailers are decreasing their physical footprints due to declining fundamentalsa trend experts predict will continue as the COVID crisis deepens.

“Indeed, the pandemic will continue to hurt the retail sector significantly and perhaps more so than other property types given the added pressure from the growth in e-commerce that have and will continue to eat into the bricks-and-mortar retail sales,” the report states.