Here Are the 10 Retail Markets With the Highest Vacancy Rates

Article originally posted on CoStar on July 3, 2019

Photo: Pixabay

The health of retail real estate may be best described with the aphorism: “Where you stand depends on where you sit.”

Many cities around the country have vacancy that’s tighter than the national average of 4.5% in spite of national retailers closing stories, big and small.

Other cities have vacancies above the national average. But that’s not necessarily bad. In fact, it might be healthy.

For some cities, those relatively vacancy rates are actually still heading down from recession highs, thanks to the lengthy economic expansion.

And vacancies tend not to hit all shopping centers equally. As many shopping malls and big-box power centers fall out of favor, there’s been a renewed interest in urban retail and stores that are part of so-called live, work and play communities.

As a result, developers have been more cautious and restrained as they sort out the shifting retail landscape. Jenkins Williamson, a partner in Columbia Development based in Columbia, South Carolina., said “debt and equity is still there for non-speculative” retail development, meaning there’s money available for those who have lined up tenants. But lenders typically want to see strong retailers willing to pay premium rents, he said.

Using recent information extracted from CoStar data, here are the Top 10 cities for retail vacancy over the past 12 months.

(Tie) 9. Houston – 5.3%

Houston’s vacancy is lower than recession levels and has stayed steady. According to CoStar’s Houston market report, the city has had strong population and jobs growth due in part to its recovering energy sector. It’s still playing catch-up to meet the pent-up demand for retail as a result, the CoStar report noted.

With 4.1 million square feet under construction, Houston leads the Top 10 and is second to New York for the most retail space under construction in the country. Even with construction, the ctiy’s 2.3% annual retail rent growth exceeds the 1.5% national average.

(Tie) 9. Kansas City, Missouri – 5.3%

Retail vacancy has been steadily declining since the recession and now sits at an historic low. Even with the vacancy above the national average, landlords have been able to increase rents. Annual rent growth is 2.7%, more than double the national average.

CoStar’s Kansas City market report cited strong leasing, little construction and demolition of largest chunks of space as key factors in lowering vacancy. According to CoStar, about 1.6 million square feet was demolished in 2017, notably Metro North Mall late in the year. The former mall site is being redeveloped into mixed use that will include office, residential and retail space but less than the 1.3 million square feet in the mall.

8. Fresno – 5.6%

The California city is the smallest retail market among the Top 10 with 47.6 million square feet. Fresno is primarily an agricultural area. “Retail spending power is limited,” CoStar’s Fresno market report noted. According to the report, the city’s household income falls well below the national average and unemployment is about double the national average despite strong job growth.

Still, vacancy has been declining and there’s been some rent growth. Most new construction involves small retail spaces. CoStar shows just 71,800 square feet under construction, or 0.2% of the city’s total inventory of space. That’s the second least in the Top 10.

(Tie) 6. Tucson – 5.9%

Vacancy has dropped to a near-decade low in the Arizona city. Strong job growth, particularly with major corporate relocations, has helped drive demand for space. “A number of the new jobs being created have the potential to help lift Tucson’s below-average median household income,” according to CoStar’s Tucson market report.

Though vacancy has been declining, it is one of two cities in the Top 10 to register a decline (-1.9%) in rental rates over the past year. CoStar’s report noted that rents are still below pre-recession levels.

(Tie) 6. Oklahoma City – 5.9%

Vacancy rates sit at about the city’s historical average. CoStar’s Oklahoma City market report said that has helped increase rents for retail along with a dearth of new retail construction. Like a lot of cities, Oklahoma City has had retailers close stores, which has offset the rate of filling new space.

Wage and population growth have dipped recently with the energy sector not providing local job growth. “Many retailers have been hesitant to expand their locations, which has also led to a slowdown in development,” CoStar’s report said.

5. Sacramento – 6%

Though above the national average, California’s state capital rate is nearly five percentage points below a year-high in 2010 and sits at an historic low. The area has had good job growth, according to CoStar’s Sacramento market report, and there’s been retailer demand for the area.

But in a typical story, construction hasn’t been strong. That has helped push up rents at a rate more than double the national average.

4. Chicago – 6.1%

Department store chain Bon-Ton’s bankruptcy last yearopened up 2.4 million square feet of space across the area when the retailers closed all stores under its nameplate and those of its subsidiaries. Toys R Us’s struggles put another 1 million square feet on the market, according to CoStar’s Chicago market report.

Chicago is only one of two cities in the Top 10 to see rents fall over the past year. But there is room for optimism: Bon-Ton’s new owner, Indiana-based CSC Generation Holdings, has been reopening stores across the area, such as Carson’s in Evergreen Park, and plans to reopen others.

3. Las Vegas – 6.2%

Retail vacancy in the casino capital has dropped significantly from its high of 11% in 2011 but still above pre-recession levels. The city roared back after the recession. Household income has been growing and tourists have been flocking to the city in big numbers. A 4.3% surge in retail rent growth over the past 12 months is among the highest in the country. CoStar’s Las Vegas market report said that demand for retail real estate has outpaced the new supply of space. Retail construction has been constrained in the decade after the recession compared to the years before it, the report noted.

2. Phoenix – 6.9%

The recession hit the city’s housing market hard. A vast number of foreclosures sent many consumers scurrying. Retail space emptied, pushing vacancy to above 12%.

But the city has recovered. Job growth has helped increased household income and drive demand for retail shopping. Vacancy has steadily declined with the help of limited construction of new space, according the CoStar’s Phoenix market report.

1. Inland Empire, California – 7.1%

The departure of retailers such as Toys R Us, Falls and Factory 2-U have left their mark on the region, but retail vacancies never reached double digits like in some areas, even in the recession. In spite of the relatively high vacancy rate now, retail rents have still been able to grow. CoStar’s report noted that different cities with in the area have had the best gains – West San Bernardino, Riverside and the airport area. These areas are “also attracting the most housing development and contain the biggest job nodes in the metro,” according to CoStar’s Inland Empire market report.