US strip-mall vacancy falls 1st time in 7 yrs

Fri Apr 6, 2012 12:00am EDT

* First drop in US strip mall vacancies in nearly 7 yrs

* US strip mall rent inches up, big-mall rent rises

* US mall vacancy continues to decline

By Ilaina Jonas

NEW YORK, April 5 (Reuters) - The average vacancy rate at U.S. strip malls fell for the first time in nearly seven years in the first quarter and rents inched up, but it is too early to call a rebound for a sector battered by the housing bust and recession, a report by Reis Inc showed.

The real estate research firm said vacancies at large U.S. regional malls continued to decline in the near-absence of new supply, but consumer spending is not strong enough to lift retail real estate out of its slump.

"The tide of the economy is not rising quickly enough to raise all the ships in the ocean of retail," according to the report released Friday.

The retail real estate sector, which includes big regional malls, open-air lifestyle centers, strip malls and power centers that are home to big-box stores, have been among the hardest hit of all types of commercial real estate. At the mercy of consumer spending, these types of real estate have reflected the diverse pressures and changes in consumer spending.

Big-box stores, which sell mass-market items like electronics and household goods, have been hit not only by the economic downturn but also by online retailers which compete on price. Recently Best Buy Co Inc said it would close 100 big-box stores and open 50 smaller ones focused on mobile phones.

"They're going to be smaller and crop up in malls and neighborhood community stores," Reis senior economist Ryan Severino said.

During the first quarter, the national vacancy rate for strip malls fell to 10.9 percent from 11 percent the prior quarter, according to preliminary figures from Reis. Strip malls, also known as neighborhood shopping centers, are usually anchored by grocery or drug stores.

"This is really only the first quarter where the vacancy rate declined. We need to see something a little bit more sustained than just a quarter or two before it really signals the beginning of a trend," Severino said.

The housing bust killed many of these centers, which remained vacant when new neighborhoods failed to grow around them. Vacancies have been rising since bottoming at 6.7 percent in the second quarter of 2005. The first-quarter decline broke through the 11 percent cyclical high the national vacancy rate had been stuck at since the second quarter of 2011.

The average asking rental rate in the first quarter rose 0.1 percent, the same increase as in the fourth quarter, to $19.05 per square foot. Effective rent, which strips out months of free rent and other perks landlords offer to lure or retain tenants, also rose 0.1 percent to $16.57 per square foot.

"Although we have not seen consistent enough improvement to declare a turnaround in the sector, the decline in the vacancy rate, coupled with the increases in asking and effective rents, is the strongest evidence to date that the sector is beginning to stabilize and recover," the report said.

In fact, with supply of new strip malls at near-historic lows, a true resurgence of healthy demand would have created a bigger decline in vacancy, Reis said.

Reis expects the vacancy rate to continue to slowly decline throughout the year, but until the U.S. economy and labor market are stronger, Reis said the outlook remains unclear for these shopping centers.

At regional malls, the first-quarter vacancy rate fell to 9 percent from 9.2 percent the prior quarter. It was the second consecutive quarterly decline for the big malls. The average asking rent rose 0.2 percent to $39.00 per square foot. Reis does not track effective rent for regional malls.

The trend has benefited real estate investment trusts, which include Simon Property Group Inc, General Growth Properties, Macerich Co and Taubman Centers Inc , which collectively own more than 70 percent of the nation's so-called class A malls, which generate the highest sales per square foot.

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