Traditional shopping centers are facing uncertain futures as the COVID-19 pandemic continues to negatively impact store occupancy and vacancy rates. The first three months of 2020 marked the first time in over a decade that retail property writ large had a negative net absorption. What does that mean? Simply put, negative net absorption results when more tenant space is empty than filling up. The resultant change in the number of occupied square feet in shopping centers has resulted in a negative downturn for the first two quarters of 2020.
What’s causing this change?
The COVID-19 pandemic required all but the most essential retailers—like pharmacies and grocery stores—to close their doors for nearly three months. This dramatic shift has seemingly sped up the process of transformation already underway in the retail and commercial real estate industries. In response to the myriad challenges brought on by the novel coronavirus, retailers have made major changes.
Some retailers have chosen to dramatically reduce the size of their real estate footprints by closing stores, while others have begun bankruptcy filings. All of these changes have left landlords struggling to lease vacant spaces in shopping centers and traditional enclosed malls that would normally be filled with department stores and other well-known retail brands.
What does this change mean for commercial real estate?
The net absorption rate is a good way to judge the strength of supply and demand in the various sectors of the commercial real estate market. When the net absorption rate is positive, demand for space is high, rental rates are competitive and property values tend to increase. However, when the net absorption rate reverses course, vacancy rates increase and rental rates slowly begin to decline.
The effect of vacancies on rental rates and leasing will inevitably vary from market to market as the year comes to a close. Any market that depends on both international and domestic tourists will be slow to return to pre-coronavirus levels of retail activity. Large, urban markets are likely to fare better, as well as smaller emerging markets like Raleigh, North Carolina and Austin, Texas.
Is there any good news?
Single-tenant net lease (STNL) assets are still in demand for investors, especially those in 1031 exchanges hoping to take advantage of the looming IRS deadline on July 15. Investors seeking a sense of safety in a still uncertain economy are pursuing listings that feature a single-tenant property leased to a tenant that offers an essential service. Fast food and quick-service restaurants (QSR) with credit rated tenants are also in demand.
Ground + Space has several assets on the market right now that would be an ideal investment for any investor. Our CVS Pharmacy listing features a NN corporate-guaranteed lease that was recently extended by 20 years. The Tire Choice property that is currently available is situated within a dense retail corridor in The Villages, Florida and boasts a NNN lease.
How can Ground + Space help?
Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. We have several listings available featuring retailers that are in a prime position to succeed in a post-pandemic economy. We are committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The IRS 1031 tax deadline is fast approaching, so please contact one of our brokers for specialized guidance during this time.
How can I stay informed?
The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.