US mall vacancies rise in 2nd quarter, rents flat

Fri Jul 8, 2011 12:01am EDT

* U.S. regional mall vacancies jump to 9.3 pct, rent flat

* Strip mall vacancies climb to 11 pct, rent flat

* Reis economist not optimistic picture will change soon

By Ilaina Jonas

NEW YORK, July 8 (Reuters) - The average vacancy rate for large U.S. shopping malls reached its highest level in 11 years in the second quarter, as department store closings took effect and retailers scaled back their floor space due to cautious shoppers, according to a report issued on Friday.

Preliminary figures by real estate research firm Reis show the vacancy rate at these regional malls rose to 9.3 percent, the highest level since 1990 and up from 9.1 percent in the first quarter.

The picture was even bleaker for U.S. strip malls where retailers gave up over half million more square feet than they rented. The vacancy rate at these local retail strips was 11 percent versus 10.9 percent in the first quarter, almost matching the 11.1 percent record set 20 years ago, Reis said.

Rents at both types of retail locations were flat.

"Even though we've been out of a recession for two years, there aren't a lot of jobs out there, and people are still risk adverse," said Ryan Severino, Reis senior economist. "That's depressing demand for both retail goods and retail space."

In addition to weak demand from consumers, landlords are grappling with competition from online sales, which reduces demand for physical stores.

"Halfway through 2011, it is difficult to feel optimistic about retail properties. Expect continued difficulties for the retail sector in the latter half of 2011," Severino said.

At regional malls, anchor stores that closed prompted some specialty tenants to leave when their leases were up. In other cases, closed anchor stores allowed specialty store tenants to break their leases.

That put pressure on rents. The average U.S. regional mall asking rent in the second quarter was essentially flat compared with the first quarter, at $38.77 per square foot, and about the same as in 2006.

Asking rent at strip malls during the second quarter was also about flat at $19.03 per square foot.

Strip malls are quicker and cheaper to build but have left the strip mall sector struggling with too much inventory.

Factoring in months of free rent and other incentives landlords use to lure tenants, effective rent was $16.54 per square foot at strip malls, the lowest level since the third quarter of 2005.

(For graphics of retail mall vacancies and rent, click: r.reuters.com/nar52s and r.reuters.com/war52s )

U.S. retailers reported better-than-expected June sales on Thursday. The 25 chains tracked in the Thomson Reuters sales tally reported a 6.5 percent gain in sales at stores open at least a year. [ID:nN1E76602K]

"On a relative basis, retail sales have done OK," Severino said. "But there was a pretty big pullback in the wake of the recession, and we haven't really gotten back to the spending levels that we once saw."

Even if demand from retailers begins to rise, it will take a while before space is leased and vacancies tighten enough for landlords to raise rents and reduce incentives.

Big mall owners such as Simon Property Group Inc (SPG.N), General Growth Properties Inc (GGP.N) and Taubman Centers Inc (TCO.N), as well as strip mall owners Kimco Realty Corp (KIM.N) and Equity One Inc (EQY.N) are scheduled to report second-quarter results in the next few weeks. (Reporting by Ilaina Jonas; Editing by Tim Dobbyn)