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Strip-Mall Vacancy Rate Is Highest in 12 Years

Reuters
Saturday, 5 Apr 2008 | 7:37 PM ET

The vacancy rate at U.S. strip malls rose to the highest level since 1996 in the first quarter of 2008, while that for big malls reached levels unseen since 2002, research firm Reis said on Friday.

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The amount of space occupied by retailers fell for the first time since Reis began tracking the sector in 1980.

"Retailers are grappling with the implications of the housing and job market downturns for consumer activity, with the result that retail sector fundamentals -- occupancy and rent levels -- are being strained by anemic demand for space," Reis Chief Economist Sam Chandan said in statement.

Strip-mall vacancies rose 0.2 percentage points from the preceding quarter to 7.7 percent.

By the end of the year, the rate likely will reach or surpass 8 percent, Reis said.

The vacancy rate for big regional malls was the highest since the fourth quarter of 2002, the report said.

Asking rent ticked up 0.4 percentage points after falling 0.4 percentage points in the fourth quarter of 2007.

Chandan said community shopping centers have some protection against economic downturns through long-term leases and tenants that supply necessities, such as groceries and drugs, but he noted that "increasingly value-conscious shoppers have alternatives in discount retailers such as Wal-Mart and Costco ."

Less-frequent shoppers spending fewer dollars affects the demand for space and the time needed to lease available space.

Space occupied by retailers in the first quarter fell by 1.36 million square feet from the prior quarter.

Asking rent growth was the most anemic since the fourth quarter of 2001, inching up just 0.4 percentage points to an average rent of $19.57 per square foot.

Factoring in months of free rent and other concessions, effective rent growth was a mere 0.1 percentage point, rising two cents to $17.62 from the previous quarter.

Of the 76 markets that Reis tracks, rents effectively fell in 31. "Not only have concessions widened further, conditions have softened to a degree that landlords are unable to raise rents," Chandan said.

Publicly traded real estate investment trusts (REITs), such as Equity Oneand Kimco Realty , often have properties that are in better locations and are operated more efficiently.

Their vacancy numbers are often lower and rents higher, said Nicholas Vedder, senior associate analyst at Green Street Advisors.

"The Reis numbers are generally a little bit more negative," Vedder said.

"That said, they're not entirely insulated from what's going on in the general economy, so we do anticipate further occupancy decline going forward."

Because of their long leases and differences in the mix of tenants, regional mall fundamentals typically don't reflect economic changes as quickly strip malls.

"Indications of stress are becoming visible in regional mall performance," Chandan said. "A growing list of national chains are adjusting expansion plans."

In January, women's clothing retailer AnnTaylor Stores said it would close 117 stores and Pacific Sunwear said it would close 154 of its urban-inspired clothing stores called demo.

Home-furnishing retailer Bombay Co., which filed for bankruptcy in September, said it would close 384 U.S. stores.

For the past few years, higher-end malls, such as those owned by Simon Property Group , have been outperforming lower-end malls owned by companies such as CBL & Associates Properties.

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