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Guess What’s Replacing Stores in Your Local Mall?

Emily Riddell | Lonely Planet Images | Getty Images

It was a one-two punch to retail malls: The increasing popularity of online shopping and the recession.

Demand for retail space is falling again after a brief recovery, according to a new report from Reis Inc. Strip malls are faring the worst, and consequently new construction in the space declined near record-levels during the quarter.

“With the economy and labor market continuing to struggle, consumer spending remains weak and inconsistent,” notes Reis senior economist Ryan Severino.

(Read More: JC Penney's CEO On 'The Rocky Road to Reinventing Retail')

Regional malls, however are outperforming the neighborhood strip malls, with vacancy rates declining in the third quarter of this year. What may be helping some of these larger properties is an influx of big chain restaurants taking over retail space. Darden restaurants, which includes the Olive Garden, LongHorn Steakhouse and the Capital Grille, to name a few, is increasingly moving into retail mall space. Chipotle is following suit.

The amount of mall space being leased by restaurants is rising steadily at 15.8 percent through August of this year, up from just over 10 percent in 2006, according to CoStar Group.

Percentage of Retail Leases Signed by Restaurants by Square Footage:

Percentage of Leases

Year
%
2006 10.4%
2007 11.7%
2008 15.2%
2009 11.1%
2010 12.7%
2011 14.6%
2012* 15.8%
*through August 2012Source: CoStar Group, Inc.

While vacancy rates are dropping from their record highs during the recession, according to Reis, mall owners are and will be increasingly challenged by the move to online shopping. That’s why the fundamental face of shopping malls is beginning to change; rather than just retail with a food court, malls are now becoming entertainment destinations.

“We have seen restaurant and what I’ll call ‘other entertainment venues’ drive that mall growth and malls have become a gathering place for people and the, Panera’s of this world help make that happen,” says Bob O’Brien of Deloitte Commercial Real Estate.

So-called “entertainment retail centers” are now the focus of real estate investment trusts (REITs) like Entertainment Properties Trust, which has invested over $600 million in eight such centers, according to its website:

“Sometimes called ‘the new mall of the new millennium,’ entertainment retail centers attract a wide range of businesses because consumers have a wide and deep thirst for fun and rejuvenating leisure experiences… now also it's dinner and shopping, dinner and ice-skating, dinner and bowling, dinner and miniature golf, or dinner and sports events on the tavern big screen with friends.”

(Read More: Why Brick-and-Mortar Stores Will Trump Online in End: CEO)

Higher end malls are seeing the biggest benefits of economic recovery and of higher end chain restaurants moving in. Mall owners want these tenants because the hope is they will drive traffic back to the retail surrounding them. Strip malls have a harder time, as patrons don’t always have to walk past another store to get to the restaurant.

SECTOR WATCH: U.S.-Based REITS

  • Host Hotels & Resorts
  • Simon Property Group
  • Equity Residential
  • Apartment Investment & Management Co
  • Vornado Realty Trust
  • Boston Properties
  • FelCor Lodging Trust
  • AvalonBay Communities
  • American Capital Agency Corp
  • UDR, Inc
  • Camden Property Trust

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick

  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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