Retail Improving But Doubts Persist

U.S. malls and shopping centers continued their slow, fitful recovery from the recession in the fourth quarter, holding relatively steady in both vacancies and lease rates.

The second half of 2010 brought relief to retail landlords by ending the rising vacancies and falling lease rates of recent years. But the slow recovery, despite stronger retail sales, indicates that retailers generally remain hesitant about leasing new space.

“The sector appears to be meandering around,” said Ryan Severino, an economist at real-estate research company Reis Inc., which tallies the vacancy and lease-rate data in the 80 largest U.S. markets.

“Without clear signs of a strong economic and labor-market recovery,” he said, “we expect this trend to persist over the next couple of quarters until there is more clarity in the direction of the economy.”

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Malls in the fourth quarter posted a decline in vacancy of one-tenth of a percentage point to 8.7%, marking the second consecutive quarter of such declines for malls, according to Reis. However, those improvements came after the industry posted its highest vacancy rate of the past decade: 9% in last year’s second quarter. The recent vacancy declines were the first for malls since the third quarter of 2007.

Meanwhile, lease rates at malls rose by two tenths of a percentage point to $38.79 per square foot per year. The slight gain was the first for malls since the third quarter of 2008.

The situation is similar for shopping centers, which are smaller centers typically anchored by a grocery store or big-box retailer with several small stores facing a common parking lot. Shopping centers tend to include more local, mom-and-pop tenants that are less financially stable than the national chains that populate malls.

Shopping-center vacancy held steady at 10.9% in the fourth quarter, unchanged for the third consecutive quarter, Reis said. That vacancy rate remains at the highest that Reis has tracked since 1991. What is more, net absorption for U.S. shopping centers in the quarter—the net amount of new space leased—amounted to just 92,000 square feet after a gain in the previous quarter of 474,000 square feet.

Lease rates at shopping centers remained relatively unchanged in the fourth quarter, declining to $16.56 per square foot per year from $16.58.

The slight recovery comes as recent gains in retail sales have spurred cautious optimism among retail landlords.

Retail-sales consultant Retail Metrics Inc. predicts that the 30 national retailers it tracks will this week post a 3.4% gain in sales for December at stores open for at least a year. That is atop a 3% gain for December 2009.

Overall, the National Retail Federation trade group forecasts that retail sales in November and December increased by 3.3% this year to $451 billion.

Drew Alexander, president and chief executive of Houston-based Weingarten Realty Investors, which owns 378 U.S. shopping centers, said his centers are losing fewer tenants than in previous years and adding more “frugal fashion” sellers like Ross Stores Inc. and TJX Cos. Inc.’s Marshalls. Other expanding retail categories include fast-casual eateries like Five Guys Burgers and Fries and self-pampering outposts like Massage Envy spas, he said,

“Things aren’t perfect,” Mr. Alexander said, “but they’re clearly better.”

However, Weingarten continues to scout for replacements for Blockbuster Inc. stores that are closing. It lost seven Blockbusters in the fourth quarter, leaving it with 29. Mr. Alexander expects to lose another eight to 10 this year. And many landlords still are filling spaces vacated by defunct retailers Circuit City Stores Inc., Linens ‘N Things Inc., Mervyn’s LLC and Steve & Barry’s LLC.

California mall developer Rick Caruso posits that top-quality malls continue to outpace their more budget-focused peers. His Caruso Affiliated Inc. announced in December that it intends to expand its upscale, 500,000-square-foot Americana at Brand mall in Glendale, Calif., by up to 130,000 square feet this year.

Mr. Caruso said expanding retailers include fashion stores such as Forever 21 Inc. and Limited Brands Inc.’s Victoria’s Secret as well as high-end electronics stores like Apple Inc. and Microsoft Corp. stores. Meanwhile, he expects store closures from the leading bookstore chains.

“If you have a good location with solid performance, you have great leasing opportunities,” Mr. Caruso said. (credit r. hudson, wsj)

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