U.S. Shopping Mall Vacancies Reach 10-Year High as Stores Fail

By Hui-yong Yu

Jan. 7 (Bloomberg) -- Vacancies at U.S. malls and shopping centers 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 percent last quarter from 6.6 percent 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 stabilize 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 stabilize we often observe anywhere from a 12- to 24- month lag until commercial retail properties begin benefiting.”

At neighborhood and community shopping centers, the vacancy rate rose to 8.9 percent from 8.4 percent in the third quarter, the highest since Reis began publishing quarterly data in 1999.

Shopping Centers Suffer

Asking rents at malls fell 0.2 percent from the previous quarter and rose 0.3 percent from a year earlier. Mall vacancies have climbed 2 percentage points from the 5.1 percent in 2005’s second quarter, the low for the last business cycle, said Reis.

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

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

“Neighborhood and community centers coming online encountered tremendous difficulties in pre-leasing retail space,” Calanog said. “This has been prevalent all throughout 2008, with new projects coming online at around 50 percent vacant, compared to the 25 percent to 30 percent vacancy levels for new projects in previous years.”

More Closing

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 Center 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 U.S. owner of community shopping centers, cut its earnings forecast for 2008, citing the credit crisis.

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

Simon Property Group Inc., the biggest U.S. 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. Simon’s multiyear leases protect the company to some extent from monthly changes in consumer spending, Simon said.

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