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Retail Vacancy Rates See Significant Increases

The national retail vacancy rate at neighborhood and community shopping centers is the worst it's been in more than a decade.

The national retail vacancy rate at neighborhood and community shopping centers is the worst it’s been in more than a decade, and regional malls are at their lowest point in more than five years, according to a recently released study by real estate analysis firm Reis Inc.

This story first appeared in the July 14, 2008 issue of WWD.  Subscribe Today.

The study reported that the vacancy rate rose 50 basis points to 8.2 percent at neighborhood and community shopping centers in the second quarter. The jump makes for the highest vacancy rate in the category since 1995. During the second quarter the vacancy rate for regional malls was up 40 basis points to 6.3 percent, the highest it has been in more than five years. The firm monitors about two billion square feet of retail space nationally.

The study comes at a time when more and more retailers are looking to let leases expire, shutter stores or are slowing their pace of expansion. Last month, J.C. Penney Co. Inc. said it will open only 20 stores in 2009, readjusting a previous plan to open 50 stores a year through 2011. Two weeks earlier, Gap Inc. revealed a plan to consolidate its subbrands, such as Gap Kids and babyGap, into its namesake stores in an attempt to rein in real estate spending. Last week, Walgreen Co. announced its intention to slow growth in the next three years to try to save $500 million in capital expenditures.

“If there’s a big concern it’s on the small center side,” said Michael Niemira, chief economist at the International Council of Shopping Centers. “Whether the centers can capitalize on the trend of shopping closer to home because of gas prices remains to be seen.”

According the Reis study, increased food and energy costs and the continuing fallout of the credit crisis mean consumers simply aren’t willing to travel as far or make as many stops when they shop. The retailers that have weathered the storm best are the larger, one-stop discounters that have cut into the market share of the stores typically found in neighborhood and community shopping centers. Smaller centers are traditionally anchored by staple providers such as grocery or drug stores and the financial strains have hurt the surrounding stores where discretionary dollars might once have been spent.

“The level in traffic in their stores is going to be a key driver in whether any retailer renews a lease,” said Sam Chandan, chief economist at Reis. “It’s reasonable to expect that retail locations that are less accessible will see relatively lower growth in traffic.”

The solution for smaller centers could be more variety in their storefronts or assortment on their racks.

“For some retailers there might be some opportunity,” said Niemira at ICSC, who pointed to Walgreen’s new private label apparel venture. “Do those smaller centers have to be recast? Maybe more apparel could be included. Obviously that doesn’t happen overnight.”

Though the vacancy rate at regional malls is lower than that of neighborhood and community shopping centers, it is still a concern.

Jack Abelson of Abelson & Associates, a site-selection consulting firm specializing in guiding manufacturers to retail sites, pointed to the recent Steve & Barry’s bankruptcy filing and its potential to add to the vacancy woes. Abelson also said that parent companies might be tempted to shutter underperforming spin-offs as Pacific Sunwear of California Inc. did late last year when it shuttered its small One Thousand Steps footwear stores and abandoned its urban-inspired D.e.m.o. division.

“The developers have raised the cost of being in these centers so high because of pressure from Wall Street,” Abelson said. “Retailers are to blame to some extent, too. If you do the business, the rent doesn’t matter.”

The creeping vacancy rates have begun to take their toll on developers and landlords as well. Reis reported weak construction-phase leasing and an absorption rate of negative 3.2 million square feet, making for the second straight quarter of negative net absorption, the rate at which available space is leased. According to the firm, the first quarter of fiscal 2008 marked the first time in the 28 years it has tracked absorption that the rate fell below zero.

The lack of demand has contributed to falling rent prices, a reflection of landlords’ fears about replacing tenants, the report says. Effective rent fell 0.1 percent nationally at shopping malls in the second quarter.

“We expect to see consumer spending growth to remain lackluster,” said Chandan at Reis. “It’s something with which the market is going to grapple with well through 2008 and 2009.”