US Retail Malls' Q2 Results Worst In 30 Years

Source : The Business Times, July 8, 2008

Strip malls seeing average vacancy rates spike sharply

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

Cautious shoppers: In addition to cutting back on clothing, jewellery and nonessentials, cost-conscious consumers are turning to lower-price grocers such as Wal-Mart at the expense of the upper end usually found at strip malls

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

Vacancies at regional malls rose 0.4 percentage points to 6.3 per cent, 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 Corp recently said it would close 600 stores by March.

GAP Inc is looking to give up some of the 40 million square feet of retail space its 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, jewellery and non-essentials, 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 Inc, 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 per cent to an average of US$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,' Mr Chandan said.

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