Despite Sears and Kmart Closures, Retail Vacancies Held Steady in Q4

The final months of 2018 saw a wave of high-profile store closures: Sears and Kmart shuttered at least 46 locations in the fourth quarter, Lord & Taylor said goodbye to its iconic Fifth Avenue flagship, Saks Fifth Avenue cleared out of Manhattan’s Brookfield Place, and L Brands closed all 23 Henri Bendel stores.

Still, according to a new report from real estate research firm Reis, the industry didn’t see the dramatic spike in vacancies some expected. Instead, retail vacancies held mostly steady at 10.2 percent, up from 10 percent in 2017. Rents also haven’t plummeted due to oversupply, confirming, per the report, that “the doomsday prognostications proved to be overblown.”

Still, the sector isn’t out of the woods yet, as many retailers have already put dozens of stores on the chopping block for early 2019, including Sears Holdings, which is liquidating another 80 Sears and Kmart locations by March, bringing its total store count close to 600, down from around 2,000 five years ago.

According to data from research group CoStar, companies announced plans to close more than 145 million square feet of retail space in 2018, far surpassing 2017’s record 105 million square feet.

Malls and shopping centers were the hardest-hit in the fourth quarter, with mall vacancies rising to 9 percent, from 8.3 percent last year. As big-box chains trim their footprints to focus on only their most profitable locations, they’ve cleared out of many less trafficked malls around the country, leaving owners struggling to fill wide swaths of space. Landlords in prime locations, however, have been able to bring in higher-paying tenants to replace beleaguered anchor stores (some of whom, like Sears, were paying well below market rate on long-term leases). This trend pushed average mall rent up 0.2 percent in the quarter.

Net absorption — a measure of the total new space leased less the space vacated by tenants in a given period — was 1.4 million square feet in the quarter, compared with 3.6 million square feet a year earlier.

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