Retail Property Has Worst Second Quarter in 30 Years

U.S. store closings and cutbacks turned the second quarter into the worst for strip mall owners in 30 years, as budget-conscious consumers flocked to low-cost warehouse-style grocery centers, according to a report by real estate research firm Reis.

Strip malls, which are usually anchored by grocery or drug stores, saw average vacancies spike 0.5 percentage points to 8.2 percent, a level unseen since 1995, according to the report released on Monday.

AP

Vacancies at regional malls rose 0.4 percentage points to 6.3 percent, the highest level since the first quarter of 2002, according to the preliminary results.

"They definitely came up weaker than our expectations and we've been pretty bearish on our outlook for retail for some time," Reis Chief Economist Sam Chandan said. "In the market in general there have been a lot of store closings."

A growing list of retailers shuttered stores ahead of lease expirations or chose not to renew leases, and as newly completed space hit the market without signed tenants.

Starbucks recently said it would close 600 stores by March. GAP is looking to give up some of the 40 million square feet of retail space it leases. That's in addition to the growing list of retailers, such as Linen 'n Things and Goody's Family Clothing, which filed for bankruptcy protection.

Consumers are constrained by increases in food and energy costs, as well as the cost of servicing debt run up during the housing boom. In addition to cutting back on clothing, jewelry and nonessentials, they have turned to lower-price grocers such as Wal-Mart at the expense of the upper end usually found at strip malls, such as Whole Foods Market , Reis said.

For the first time since 1980, more space became available to rent at strip malls than was rented out -- about 3.2 million square feet more. Part of the available space came in the form of 5.7 million square feet of new development that came on the market during the quarter.

The extra space translated into falling rents at strip malls, down 0.1 percent to an average of $17.60 per square foot.

"The downward pressure on rent is coming from landlords being very nervous about the idea of losing a tenant when they know that there's a paucity of replacements for that tenant in the current market environment," Chandan said.

Preliminary figures show that regional malls were barely able to raise rents, with just an anemic 0.2 percent rise excluding concessions, its weakest gain since the second quarter.

Copyright 2009 Reuters. Click for restrictions.