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How Much Further Could U.S. Retail Rents Drop?

Estimates range from declines of 8.5 percent to 13.0 percent through 2020.

Even more turmoil lies ahead for the U.S. retail sector as effective retail rents are projected to plunge 11.00 percent in 2020, according to Moody’s Analytics recent market forecast.

This drop would be nearly twice the decline in retail rents that occurred following the Great Recession of 2008. It will also make retail the hardest-hit commercial real estate sector, Moody’s Analytics pointed out.

Barbara Byrne Denham, Moody’s Analytics REIS senior economist, says she never thought she would see such steep retail rent declines.

“I wonder if that’s going to be the bottom,” she notes. “I guess that’s the big question. Hopefully, it is.”

The retail sector, already pressured by the rise of e-commerce before the COVID-19 crisis, is now burdened with even more wide-scale store shutterings.

“Store closures have made it difficult for retail tenants to pay rent, which has negatively impacted landlords. It is not yet clear how effective government support will be in this sector,” said Victor Calanog, head of commercial real estate economics at Moody’s Analytics, in a prepared statement.

Permanent store closures could explode in 2020, with market research firm Coresight Research projecting more than 15,000 of them.

The latest retail bankruptcy victims include J.C Penney, Neiman Marcus and J.Crew J. Crew—and these are likely the first of many defaults and retail closures that analysts anticipate in 2020.

As a result, national retail vacancies are expected to rise past historic highs.

“From store closures, hits to incomes and values, to the ambiguity surrounding who pays for rent relief, the future is bleak for retail properties,” wrote Calanog, in a report titled “Retail Armageddon: COVID-19 and the Future of Retail Rental Markets.”

“It’s just a double-whammy going on right now,” Denham adds.

Retailers were already shuttering stores pre-COVID-19, and when big-box anchors and department stores close, that impacts foot traffic and trickles down to other mall and shopping center tenants, she notes. “And it’s just this snowballing, and the gravity gets steeper and steeper. It’s really hard to see when things will bottom.”

To make matters worse, U.S. retail sales plummeted a record 16.4 percent from March to April—far greater than the 12.3 percent drop anticipated.

Other firms weigh in

Commercial real estate services firm CBRE forecasts an average rent decline of 8.5 percent for neighborhood centers, community centers and strip centers through the remainder of 2020. That’s compared with a 5.0 percent drop in rents during the Great Recession, says Jing Ren, an economist with CBRE Econometric Advisors.

Many retailers are having a tough time paying rent and are seeking rental relief. Rent often came in late in April, CBRE reported. Payment rates ranged from 10 percent to 20 percent of total amount owed for malls and outlet centers, which were largely closed under COVID-19 restrictions. While grocery-anchored shopping centers with more non-essential retailers fared better, they still only produced 55 percent to 80 percent of their normal rent payments.

Rent collection at shopping centers so far in May has been better than anticipated, especially in states that have begun reopening, CBRE noted. Most of the rent negotiations during forced closures have been for deferrals in exchange for lease term extensions. However, some landlords have considered rent abatement for smaller mom-and-pop tenants, CBRE reported.

Recovery for the retail sector could take 36 months, according to Ren. Recoveries will also vary by market. She says cities like Miami and Las Vegas, which rely heavily on tourism, will be hit especially hard.

Meanwhile, research firm the CoStar Group is forecasting annual retail rents across the board will decline by 13.0 percent in 2020. The impact will likely be the worst in the general retail category (down by 13.3 percent) and the most “mitigated” in the grocery-anchored shopping center category (down by 12.6 percent).

Those are significant drops from what was being recorded in the months prior to the pandemic.

“In general, over the past few years, retail rent growth has been rather strong at around 2.6 percent,” says Robin Trantham, a consultant with CoStar Group. “That’s mainly due to strong demographic growth in the U.S. as well as relatively muted supply growth.”

“Now going into this coronavirus outbreak, we’re seeing around 50 to 60 percent of retail was temporarily closed across the country for a large portion of time, and as a result, retail rent growth is surely going to be impacted,” he says.

The decline in retail rent levels is going to be significantly deeper than during the Great Recession, when CoStar tracked rents falling by around 4.0 to 5.0 percent annually, Trantham says.

In addition, no center type is immune to the effects that the lockdown will have.

“We’re seeing that malls and power centers may have more exposure to the types of tenants that were deemed non-essential and were closed for a while, so they’re probably going to feel more of an impact going forward,” he says.

But while neighborhood and community centers have benefitted somewhat from having their grocery and other essential stores remain open, they still have a good portion of their tenants that were shut down and are going to be negatively impacted, Trantham adds.

Rent collection was down in April

U.S. retail landlords collect roughly $20 billion in rent in a typical month, Trantham notes.

“From what we’ve been hearing for the month of April, retail landlords had collected around 50 percent of rents,” he says. “I’m inclined to believe that May will be a similar story if not worse, just because of how April seemed to be the peak of the lockdown.”

He agrees with CBRE’s Ren that there are markets that are going to be impacted worse than others.

“Our general thought is that markets that are more exposed to at-risk industries, which would be leisure and hospitably, retail trade and energy, are going to be hit particularly hard by this downturn,” he says. “These are markets like Las Vegas, Orlando and Honolulu. We believe they will face the steepest losses going forward.”

Also, those markets with larger pipelines of new retail construction will feel the strain. Nationally, new retail construction has been muted in recent years. But markets in the southern U.S. have generally been experiencing stronger retail supply growth.

“Markets like Orlando and Raleigh, N.C. were seeing fast supply growth going into this, and they will feel the impact,” Trantham says. 


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