Mall vacancies nearing 10-year highs: Reis

Source : Business Times - 8 Jan 2009

Vacancies at US malls and shopping centres approached 10-year highs in the fourth quarter, and are set to rise further as declining retail sales put more stores out of business, research firm Reis Inc said.

Regional mall vacancies rose to 7.1 per cent last quarter from 6.6 per cent in the third quarter. It was the highest vacancy rate since Reis began tracking regional malls in 2000, as well as the largest quarter-to-quarter jump in vacancies, according to New York-based Reis.

More than a dozen retailers, including Circuit City Stores Inc, Linens ‘n Things Inc and Sharper Image Corp, filed for bankruptcy protection in 2008 as the credit squeeze and recession drained sales. Vacancies will rise further until the job market recovers, housing prices stabilise and lending resumes, restoring consumer confidence, said Reis.

‘So much of consumer spending depends on the wealth effect,’ said Victor Calanog, director of research at Reis. ‘Unfortunately, all three conditions are still in flux. Even when they stabilise we often observe anywhere from a 12 to 24 month lag until commercial retail properties begin benefitting.’

At neighbourhood and community shopping centres, the vacancy rate rose to 8.9 per cent from 8.4 per cent in the third quarter, the highest since Reis began publishing quarterly data in 1999.

Asking rents at malls fell 0.2 per cent from the previous quarter and rose 0.3 per cent from a year earlier. Mall vacancies have climbed two percentage points from the 5.1 per cent in 2005’s second quarter, the low for the last business cycle, said Reis.

Asking rents at shopping centres, which are typically anchored by a grocery store, fell 0.3 per cent from the prior quarter and rose 0.4 per cent from a year earlier. Effective rents fell 0.9 per cent from the prior quarter and were down 1.1 per cent from a year earlier, according to Reis.

At neighbourhood shopping centres, tenants vacated more space than they leased, causing so-called net absorption to shrink by 4.1 million square feet, according to Reis.

‘Neighbourhood and community centres coming online encountered tremendous difficulties in pre-leasing retail space,’ Mr Calanog said. ‘This has been prevalent all throughout 2008, with new projects coming online at around 50 per cent vacant, compared to the 25 per cent to 30 per cent vacancy levels for new projects in previous years.’

Retailers will close 12,000 stores in 2009, after the worst holiday sales in 40 years, according to Howard Davidowitz, chairman of retail consulting and investment-banking firm Davidowitz & Associates Inc in New York.

The Bloomberg REIT Shopping Centre Index of 20 companies led by Kimco Realty Corp lost a third of its value during the past year, about the same as the broader Standard & Poor’s 500 Index. Kimco, the largest US owner of community shopping centres, cut its earnings forecast for 2008, citing the credit crisis.

The Bloomberg REIT Regional Mall Index of seven mall owners fell 57 per cent. The index was dragged down by General Growth Properties Inc, the country’s second-largest regional mall landlord, whose shares tumbled 96 per cent. The company took on debt for acquisitions and couldn’t refinance once the credit crisis took hold.

Simon Property Group Inc, the biggest US mall owner, lost 435,000 square feet to bankruptcies last year through Sept 30, up from 50,000 square feet in the same period a year earlier, chief executive officer David Simon said in November. Mr Simon’s multi-year leases protect the company to some extent from monthly changes in consumer spending, Mr Simon said.