The retail sector overall is not performing as badly as many feared, though “vacancy remains elevated,” according to Moody’s Analytics economist Ermengarde Jabir. According to Moody’s associate data scientist Ricardo Rosas, U.S. retail vacancy sits at 10.3% at the moment.

Regional malls, in particular, are continuing their pre-pandemic trend of bringing up the average. Their vacancy peaked at 11.5% in the second quarter of 2021 but did decline to 11% a year later. For regional malls, “asking rent growth has been positive, albeit weak, in four of the past five quarters,” Jabir said.

Regional malls are skewing the average for commercial mortgage-backed loan delinquency, as well. According to Moody’s, 7.9% of retail CMBS loans were 60 or more days delinquent in July. Bringing up that average were regional malls, at 16.9%; for all other retail properties, the share drops to 5.4%.

That “indicates that brick-and-mortar is not in as dire straits as frequently perceived,” Jabir said.

Across the U.S. retail property sector, CoStar national director of retail analytics Brandon Svec said, retail vacancy has compressed over the past year. That’s because demand for space has increased while tenant closures and move-outs have slowed. “The market remains bifurcated, though, and we continue to see larger spaces staying vacant for longer or struggling to find a tenant at all,” he said.

Filling the Vacancies That Do Exist

There are always short-term leases, to start. Seasonal occupants like Halloween stores and Christmas-themed stores can provide revenue and generate foot traffic, said Daniel Villalpando, partner at law firm Cox, Castle & Nicholson. “Pop-up options are available in some of the tonier parts of the country, sponsored by various influencers. Think: the Kardashians. Owners need an open mind to consider short-term pop-ups versus long-term leases. Creativity is needed when it comes to lease structures.”

As for the longer-term tenants that are actively looking, Villalpando said clothing discounters and dollar stores are in growth mode likely will scoop up a good share of vacant space in the immediate future. And in general, though the window is closing, “some tenants may be more inclined to cut a deal now and try to open prior to Black Friday in order to take advantage of increased sales during the holiday season in 2022,” he said.

Jessica Rosati, vice president of engagement for property and asset management firm RREG, said consumers’ embrace of online shopping means landlords need to accept they won’t be able to backfill a vacant space with the same use. “They need to reimagine what their tenant mix can be and move away from in-store product sales in favor of experience and service,” she said. “This is especially true for malls. There is a much greater focus on mixed-use and co-locating uses. For example, in traditional malls, you may see a high-end bowling alley with a movie theater and a wide variety of restaurants all in the same area. This is a meaningful way to repurpose existing storefronts and malls, and it works well if you’re intentional and effectively match uses. Traditional shopping malls are also filling vacancies with office uses, such as insurance agencies and med spas, which can benefit from the cross traffic.”

Beta partner and co-founder Richard Rizika said landlords should be working on bringing in foot traffic. “As an owner, what are you doing to embrace the consumer?” he challenged. “Are you waiting for your retailers to grow to drive traffic, or is the owner increasing traffic through community engagement by creating gathering areas for community events?”

When You Can’t Lease, Renovate

Dave Cheatham, president of the X Team Retail Advisors network and of member firm Velocity Retail Group out of Phoenix, attributed the decreasing vacancy to the small amount of new shopping center construction. “Since the Great Recession, big-box retailers dialed back their expansion plans and shifted focus to their online business, which suppressed new development, he said.

More recently, he added, “grocery tenants have anchored the most prolific shopping center development, [but] there is minimal speculative space being built or available in the market right now.” The more recent rise in construction costs, upward of 30% since the pandemic began, further stymied new development. “We aren’t building much across the country today,” Svec said. “Actually, we are seeing construction starts and activity hover at their lowest levels in decades, but we do still have a fair amount of older, out-of-place stock that needs to be removed.

Meanwhile, the rents that new, ground-up construction can get are out of reach for many prospective tenants, prompting them to lease in existing properties. “Many retailers find themselves considering secondary retail spaces that they would have previously overlooked,” Cheatham said. “Several of our clients are revising their corporate strategy and adjusting expectations to meet the current reality. We do find that vacant Class B properties are slowly being absorbed in the market. We expect this trend to continue as long as construction pricing dynamics are negatively impacted.”

Cheatham acknowledged that there will always be a small percentage of obsolete retail space that remains unleased. “This will always be a factor, regardless of macroeconomic conditions,” he said.

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So what about well-located retail properties that nonetheless have stopped attracting tenants and foot traffic? That could owe to the age of the properties, demographic changes or newer developments nearby. “Such properties provide an ideal opportunity for conversion,” Jabir said. “Conversion doesn’t have to be as drastic as a redevelopment to apartments, for example, but can mean refitting the existing space to attract medical office tenants or experiential retail.” She added that experiential retail concepts, such as indoor miniature golf, occupy larger footprints and can revive floundering shopping centers whose locations are not in as high demand.

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An alternative to conversions and renovations to accommodate particular tenants: “Demolishing larger stores and replacing them with smaller, multi-unit retail or mixed-use properties with greater density has also been a winning strategy for many landlords with larger, difficult-to-lease spaces,” Svec said.

Terra Alma managing director Edie Weintraub said thoughtful mall redevelopment allows existing space to thrive while incorporating the new. Often, malls “were oversized and facing inwards, and now many are peeling the roof off to become what they were before: an open-air center,” she said. “Removing an anchor, whether Sears or JCP, allows a fresh look at real estate.” So long as the location and market are strong, “adding entertainment or outdoor recreation — perhaps a live music venue — and common gathering spaces to help transform a 1970s/80s mall will help its ability to evolve,” she said.

Update First, Renovate Later

It might seem like a tough time to renovate, as construction prices are high, competition for tenants is strong and a recession threatens to appear. Nevertheless, Villalpando said older properties in revitalized areas shouldn’t sit idle. He suggested upgrading as necessary to attract new tenants now and renovating portions later, when more capital is available and construction costs come down. He also emphasized flexibility in negotiations. “Landlords may be willing to take less in rent in the immediate future if it means a tenant can/will use its own funds for its buildout,” he said, adding that incentives like free rent and an agreement to renovate in the future may help landlords get tenants to the table.

Rosati agreed, saying existing properties must adapt and improve, or they won’t survive.