Net absorption of retail space during the Q3 totaled 30.2 million square feet (msf) and was the highest level since the fourth quarter of 2017. As of December 9, 2021, a little over two months into Q4 2021, net absorption of retail space totals 17.9 million square feet (msf) where 96% of the gains in net absorption were primarily driven by strong demand for general retail and neighborhood space. Retail vacancy rates decreased from Q3 by 10 basis points to 4.7% as of December 9, 2021, as the majority of retail assets experience compression, with the exception of malls. New retail supply, which has been low throughout the year, hit a new low in Q3 2021 of 2.9 msf but has rebounded to 3.2 msf as of today. Most of the retail space under construction remains centered around general retail.
Retail asking rents continue an upward trend as they reach 2.7% above where they were a year ago, with malls seeing a higher percentage increase from Q3, 0.8%. Most recent data indicate mall asking rents have been increasing throughout 2021 and currently are at a 2.3% increase year-over-year. But strip centers, at 3.4%, represent the highest year-over-year increase of any retail property. According to CoStar data, markets like San Francisco, CA; New Haven, CT; and Saint Louis, MO have seen negative changes in retail asking rents with respect to last year. Contrastingly, the leaders that show strong year-over-year gains in asking rents were primarily Midwestern, Southwestern and Southern metros such as Akron, OH; Las Vegas, NV; Tulsa, OK; Salt Lake City, UT; Fort Lauderdale, FL; Jacksonville, FL; Atlanta, GA; Nashville, TN; Tampa, FL, and Cincinnati, OH.
Malls Remain Vulnerable
Malls remain the stubborn retail asset and despite foot traffic returning, it remains vulnerable to problems a potential increase in COVID infections from cold weather would cause. Net absorption, which had been improving as of Q3 2021, is reversing as of December 9, 2021, where more than 3 msf has been returned to the market. Mall supply increased by 259,299 square feet. There was a total of 69 buildings that were under construction as of Q3 totaling 3.8 msf. Overall mall vacancy increased by 40 basis points to 8.4%, and asking rents increased 2.3% year-over-year.
Big-Box Demand Fueling Power Center Growth and Leasing Activity Heading in A Positive Direction
Power centers, which are primarily anchored by tenants such as home improvement, discount departments, and warehouse clubs, with a few small tenants, and which range from 250,000 – 600,000 sq. ft., has 1.1 msf of net absorption as of December 9, 2021. Demand growth should continue given recent opening announcements from retailers such as Dollar General. Vacancy rates continue to decline as it reached 5.4%. Leasing activity has been making progress towards pre-pandemic levels, with the high of 2021 coming in last quarter (3.8 msf). Q4 2021 leasing square footage totals 2.4 msf currently. Currently, there are 56 power centers under construction totaling 1.3 msf.
Vacancy Rate Continues Decline in Smaller Centers
Smaller shopping centers such as neighborhood centers and strip centers saw increasing demand throughout the year. The demand for neighborhood and strip center retail assets accounts for 50% of the demand in Q4 2021 and 48% of the net absorption seen since the beginning of 2021. Net absorption in Q4 for neighborhood centers totals 6.3 msf and 2.5 msf for strip centers. Vacancy rates continue to decline for both of these property types as neighborhood and strip center vacancy declined by 20 basis points, respectively, towards 7.2% and 5.3%. Rent growth for these properties exhibit similar growth patterns as they both see continued increases in year-over-year asking rent growth. Asking rents for neighborhood centers saw 3.2% growth, while strip centers saw 3.4% growth.
General Retail Strength Continues
General retail (single-tenant, freestanding, and general-purpose structures such as drugstores) saw continued increases in net absorption throughout the year where net absorption hit a high of 14.2 msf in Q3 – the highest since Q3 2018. As of December 9, 2021, Q4 net absorption totals 10 msf. Demand continues to outpace supply since Q4 2020, where supply currently totals 1.9 msf. General retail has the lowest vacancy amongst retail properties at 2.8% and this represents a decline of 1 basis point from Q3. General retail asking rents increased 2.5% year-over-year in Q4 2021.