U.S. still has too many strip malls - report

NEW YORK Wed Oct 2, 2013 11:29pm EDT

NEW YORK Oct 2 (Reuters) - The average vacancy rate for a U.S. strip mall was unchanged in the third quarter, as the sector still wrestled with the oversupply that closely followed last decade's housing boom, according to a report real estate research firm Reis Inc released on Wednesday.

While large malls did not have the same problem with oversupply, some are better off than others. Some of the best ones owned by real estate investment trusts such as Simon Property Group Inc enjoy vacancies rates of about 5 percent. Others limp along with 40 percent of the space vacant. Even the stronger ones and their retail tenants are still confronting competition from online shopping and are figuring out ways to co-exist.

"Retail is incredibly sticky," Reis Chief Economist Victor Calanog said. "I don't know what you do with these retail centers. As long as your pulling in some money from existing tenants, a lot of them limp along."

In the third quarter, the national vacancy for strip malls was 10.5 percent, unchanged from the second quarter and down 0.3 percentage point from a year earlier, according to preliminary figures by Reis. But it still was only 0.6 percentage point off of the peak rate of 11.1 percent seen two years ago, Reis said. These shopping centers are usually anchored by supermarkets or large drug stores.

Developers have been loathe to build new centers. So far this year, only 3.6 million square feet of new space has been brought to market, on track to break the 32-year record low set in 2010, when 4.5 million square feet opened, Reis said.

Asking rent at these strip malls inched up 0.3 percent to $19.25 per square foot. Effective rent, which factors in months of free rent and other perks landlords offer to keep or attract tenants, rose 0.4 percent to $16.75 per square foot, up just 1.1 percent year over year.

Meanwhile, permitting restrictions and large costs have helped keep the supply of new malls much tighter. Still, the recession, credit crisis, slow recovery have impacted the sector's rebound.

In the third quarter, the national vacancy rate dipped to 8.2 percent, down 0.1 percentage point from the third quarter, down 0.5 percentage point from a year earlier and off from the cyclical peak vacancy rate of 9.4 percent in the third quarter 2011.

Asking rents grew by 0.4 percent in the third quarter and 1.4 percent from a year ago to $39.77 a square foot. It as the tenth consecutive quarter of rent increases at the national level for regional malls, Reis said. Reis does not track effective rent for regional malls.

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