Vacancies at U.S. Shopping Centers Climb After Holding Steady for A Year

Vacancies at U.S. shopping centers rose for the first time in a year in the second quarter as retail properties lagged behind the rebound by offices and apartments, according to Reis Inc. (REIS) Regional mall vacancies climbed to the highest level on record.

The vacancy rate at neighborhood and community shopping centers rose to 11 percent from 10.9 percent, where it had stood since the second quarter of last year, the New York-based real estate research firm said today in a report. The rate for regional and superregional malls increased to 9.3 percent, the highest since Reis began collecting the data in 2000.

Retailers are cutting back on space and closing stores as unemployment remains above 9 percent and online competition grows. More than a dozen national retailers have declared bankruptcy since the recession in 2008 and 2009.

“This remains consistent with our view over the last couple of years that the retail sector will be the last to recover from the effects of the recession,” Ryan Severino, a senior economist at Reis, said in an e-mail.

Apartment vacancies fell to 6 percent in the second quarter, the lowest since the end of 2007, from 7.8 percent a year earlier, according to a Reis report yesterday. Downtown office vacancies dropped to 13.9 percent, the lowest since mid- 2009, from 14.8 percent a year earlier, Cushman & Wakefield Inc. said today.

Rents Slip

Shopping centers, usually anchored by a grocery store or discount retailer, had a net drop in occupied space of 670,000 square feet (62,000 square meters) from the first quarter, Reis said. A total of 638,000 square feet of space at strip malls came to market in the second quarter, the second-lowest amount since Reis began tracking the data in 2000.

Shopping center owners’ asking rents and the actual rents paid by tenants after price breaks were unchanged from the first quarter, the 12th consecutive quarter of no change or declines, Reis said. Asking rents averaged $19.03 per square foot, down from $19.07 a year earlier. Effective rents fell to an average $16.54 a foot from $16.58.

“With demand remaining so weak and new completions anticipated to increase in the latter of half of 2011, we expect the vacancy rate” to set a record later this year, Severino said.

At regional and superregional malls -- properties often anchored by department stores -- asking rents averaged $38.77 per square foot, little changed from $38.75 in the first quarter and $38.72 a year earlier, the report said.

Forces at Work

“This segment of the retail sector is struggling not only from weak demand but also from the echo effects from anchor vacancies that spiked in 2009 and 2010,” Severino said. “Other anchor and non-anchor tenants continue to look for other options or scale back on their need for space.”

Design Within Reach, the furniture retailer known for modern classics such as Eames chairs and George Nelson lamps, illustrates the forces buffeting retail landlords. The Stamford, Connecticut-based chain closed one-third of its 70 U.S. stores during the past 18 months and cut deals for rent reductions in exchange for longer leases.

“The company overexpanded in 2006 and 2007, right before things started to get tough,” Chief Operating Officer John McPhee said in a telephone interview. “In some cases we did ‘blend and extend.’ We get a lower rate and we give them a longer term. We found the majority of landlords to be reasonable and very flexible to partner with us to keep the company alive.”

Online competition also is prompting some retailers to take less space.

Dayton, San Francisco

“We have seen online sales growing at double digits year over year for the past several quarters and that certainly has to be impacting brick-and-mortar store sales,” said Abigail Rosenbaum, senior economist at CBRE Econometric Advisors in Boston, a unit of CB Richard Ellis Group Inc., the world’s largest commercial property services firm. Online retailers account for about 9 percent of retail sales, she said.

Dayton, Ohio, had the highest shopping-center vacancy rate among metropolitan areas, at 17.1 percent, Reis said. San Francisco had the lowest, at 3.8 percent, although rents fell in the city.

“San Francisco is very strong with tech coming back there,” McPhee said. “It seems right now there are all kinds of startups and people calling and saying, ‘Hey, how quickly can you get me 50 Aeron chairs?’ That happened the last time when it was a bubble. We hope it’s not a bubble.”

To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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