Vacancies at U.S. regional malls rose to the highest level in at least a decade in the first quarter, a sign that landlords are struggling to keep tenants after the recession even as retail sales rise, Reis Inc. said.
The vacancy rate climbed to 9.1 percent from 8.9 percent a year earlier and 8.7 percent in the fourth quarter, the New York-based research firm said in a report today. It was the highest since Reis began publishing data on regional malls in the beginning of 2000.
An eight-month rise in U.S. retail sales has failed to spur increased mall occupancy, partly because of the amount of time it takes to structure long-term leases, said Victor Calanog, chief economist at Reis. The bankruptcy of Borders Group Inc., the second-biggest U.S. bookstore chain, and closings by Macy’s Inc., the No. 2 department store, also contributed to the vacancies, he said.
“We should see some improvement in the retail sector sometime later this year or early next year,” Calanog said in an interview. “A reasonable estimate of when healthier sales will translate into rising demand for retail space is around nine to 12 months.”
Some of the recent closings reflect the lingering impact of the recession. Retailers often decide to shut stores several months after a period of declining sales, and smaller businesses within a mall might close as overall traffic slows following the departure of an anchor tenant, Calanog said.
Borders, based in Ann Arbor, Michigan, filed Feb. 16 for Chapter 11 bankruptcy protection. The company said it plans to shut about a third of its stores and is renegotiating leases for others.
Mall landlords’ asking rents slipped in the first quarter to an average $38.75 per square foot from $38.79 both a year earlier and in the fourth quarter, according to the report. “Rents are now back to levels last observed in the second quarter of 2006,” Calanog said.
Regional malls typically include department stores along with fashion and general merchandise retailers and range in size from 400,000 to 800,000 square feet (37,000 to 74,000 square meters), according to the International Council of Shopping Centers. The Reis data also include super-regional malls, such as the Mall of America in Minnesota, South Coast Plaza in Southern California and Tysons Corner Center in Virginia, which are defined as those larger than 800,000 square feet.
Neighborhood Shopping Centers
At neighborhood and community shopping centers, which usually are anchored by discount and grocery stores, the vacancy rate rose to 10.9 percent from 10.7 percent a year earlier. The rate was unchanged from the three previous quarters and the highest since it reached 11 percent in 1991, according to Reis.
Rents paid by shopping center tenants dropped to an average $16.55 a square foot from $16.67 a year earlier and $16.56 in the fourth quarter, according to Reis. Landlords’ asking rents fell to $19.03 a foot from $19.12 a year earlier and $19.05 in the previous three months.
CoStar Group Inc., a Washington-based data firm, said the vacancy rate for all types of U.S. retail properties fell to 7.1 percent in the first quarter from a revised 7.4 percent a year earlier and was unchanged from the fourth quarter. CoStar’s rate includes freestanding stores, regional malls, strip malls and community shopping centers.
Retail properties overall have had net occupancy gains for seven quarters, longer than office or industrial buildings, reflecting increased consumer spending and job creation, according to CoStar.
“The good news is the rate of decline has slowed significantly,” thanks to more consumer spending and corporate hiring, Chris Macke, senior real estate strategist at CoStar, said in an interview. “We’re starting to see that trickle through,” he said.
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