Marcus & Millichap: Multifamily units in malls will likely increase

Refilling empty mall and shopping center anchor spaces with apartments has become a common practice among developers, and one that is likely to increase.

The United States apartment vacancy rate hit an all-time low of 2.5% in early 2022, and while it has cranked up to 5% in this year’s first quarter, demand continues to surge as high interest rates stall purchases of single-family homes.

Rental demand remains incredibly high. America is short some three million apartments, according to Marcus & Millichap senior VP John Chang, director of the expansive brokerage’s research and advisory services department.

“During the pandemic, marriages were put on hold, tenants weren’t evicting anybody, young adults started moving back home,” Chang observed. “As we came out of it, there was a surge of demand for apartments, but multifamily development can’t react that quickly. It’s a multi-year delivery process.”

The live-work-play era of retail development catered to millennials who wanted to exist inside that social climate. Now heads of young families, they still want the entertainment, shopping, and walkability that mixed-use centers provide, but don’t want to feel like they are living downtown.

“Amenities that you find in a retail-based center boost the value of the housing, even if they don’t check all the boxes,” Chang said.

Single-family homes available for purchase remain less than half the historic average, which is reinforcing elevated prices, according to Marcus & Millichap’s second-quarter multifamily report. The average 30-year mortgage rate is about twice as high as it was a year ago, making borrowing costly and reducing the incentive for owners to sell. Broad inflation has made it harder to save for a down payment as well.

Chang believes that more retail real estate developers are likely to add residential components as it becomes easier for them to reclaim ownership of huge anchor spaces held hostage by retailers with cheap, long-term leases.

In April, the Supreme Court ruled in favor of Mall of America in its effort to retain control of a former Sears space whose $10-a-year lease is held by Eddie Lampert’s Transform Leaseco.

“I think there will be a little bit of a lull with developers taking on new construction projects in the current economic climate,” said Chang. “But some towns want projects like this and so I think that we’ll see a fair amount of them going up in the next few years.”