The Other Real Estate Crisis: Are ghost malls going to haunt the economy?
So far, America’s real-estate agony has been confined largely to the vast residential sector. Commercial (office buildings) and retail (malls, strip malls, big boxes) real estate have held up rather well, even though those markets were propelled by the same factors that sent housing into orbit: easy credit, an abiding faith in perpetually rising asset values and misplaced optimism about economic expansion.
But when the economy slows and threatens to go into recession, it’s usually bad for all classes of real estate. And despite President Bush’s measured happy talk on the economy earlier this week, indicators are rising that American consumers are keeling over from exhaustion. Shoppers unwilling to shop spells trouble for the tenants of malls and strip malls—and for their owners and lenders. All of which suggests: get ready for the ghost mall!
The retail real-estate market has already started to slow. In the third quarter of 2007, 7.4 percent of retail space nationwide was vacant, according to Reis Inc. A vacancy rate of 7.4 percent isn’t tragic by any means. But it’s the highest level since 2002, and it’s up from 6.8 percent at the end of 2005. The third quarter of 2007 marked “the 10th consecutive quarter of flat or deteriorating retail occupancy at the national level,” noted Sam Chandan, chief economist at Reis, in a recent report. Thanks to continuing growth in supply and flagging demand, there was about 140 million vacant square feet of retail space in the third quarter of 2007, up from 124.4 million vacant square feet at the end of 2006.