NEW YORK--(BUSINESS WIRE)--The CMBS retail sector will continue its slow, steady recovery, despite recent store closure announcements, Fitch Ratings says. We expect the recovery to go on as vacancies remain low, rents have modestly risen and net absorption has been on the rise.
Macy's announcement last month that it would close approximately 100 of its full-line stores (15% of its current 675 full-line locations) was only one of a number of recent closure announcements from retailers. This week, Kmart announced the closing of 64 stores. Aeropostale, which filed Chapter 11 in May, will close approximately 550 stores. Finish Line is slated to close 150 stores over the next 48 months and Office Depot announced 300 store closings over the next three years. Anchor-tenant closures, such as Macy's, could have a further negative impact on malls if the loss of Macy's triggers co-tenancy clauses with other tenants.
However, regional mall performance has trended slightly better recently. Regional mall vacancy saw a slight increase in second-quarter 2016, ending the quarter at 7.9%, up 10 bps from the previous quarter. Mall rents rose another 0.5%, ending the quarter at $41.98 per square foot. Net absorption (a measure of occupancy) rose in the second quarter, though the levels of space absorbed remain low by historical standards. Reis data says new completions for neighborhood and community center spaces declined during the quarter -- the lowest level of quarterly completions since second-quarter 2013. Vacancy for neighborhood and community centers experienced a modest decline of 10 bps to 9.9% while rents rose 0.4% to $20.28 per square foot.
Consumer confidence remains strong and, despite weaker-than-expected retail sales in July, most forecasters expect consumer spending to strengthen throughout the rest of 2016. Malls have also benefitted from the rise in nontraditional tenants. Restaurants and service providers (nail and hair salons, spas and health clinics, among others) continue to see strong growth and have been leasing space in growing numbers.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.