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July 07 , 2008

Vacancies Rise at Retail Centers

Stores Being Closed, Expansions Curbed; Strength in Rentals
July 7, 2008 - by Kris Hudson and Nick Timiraos | The Wall Street Journal. The faltering economy took a heavy toll on malls and shopping centers in the second quarter, but it didn't hurt the rental-apartment market as much as expected.
Vacancies at retail properties rose to multiyear highs in the second quarter as retailers closed stores and curtailed expansion plans. Meanwhile, apartment complex vacancies remained unchanged and rents rose by a  stronger-than-expected 1.1% in the quarter, according to real-estate research firm Reis Inc. in New York.
The higher retail vacancy rate stems from the slowdown in consumer spending and the weak housing market, among other economic pressures. Vacancies at enclosed malls in 76 major U.S. markets rose from 5.9% in the first quarter to 6.3% in the second quarter, the highest level since early 2002, according to Reis.
Faring worse were open-air retail venues such as big-box centers and grocery-anchored strip centers. Vacancy in those formats climbed from 7.7% to 8.2% in the second quarter, the,highest tally since 1995. Open-air centers tend to lose more tenants in a bad economy because they cater more to local, mom-and-pop shops. Malls, on the other hand, house more national retailers that tend to be more stable financially.
Regardless, all retail formats have lost at least some momentum. The International Council of Shopping Centers predicts 6,500 stores will close this year, the most since 2001. A slew of national retailers including Kohl's Corp., Chico's FAS Inc. and Starbucks Corp. have reined in their growth plans. Particularly draining to the confidence of retail landlords last quarter were the financial struggles of rapidly growing discount retailer Steve & Barry's LLC, which had become a go-to candidate to fill vacant anchor stores.
"We've had unprecedented growth over the last 15 or 20 years" in the U.S. retail market, said Steven Lieberman, chief executive of Retail Connection, a Dallas-based retail developer and leasing specialist. "Clearly, that is slowing down."
Some landlords anticipate a boost from the U.S. expansion of foreign retailers and offshoots of established retailers, such as American Eagle Outfitters Inc.'s new Aerie stores.
In the apartment market, the "shadow market" of unsold homes offered for rent continues to keep renters out of apartments. Otherwise it is a strong market for landlords. They continue to benefit from the housing slowdown that has created more renters and led existing renters to defer homeownership given the tightened mortgage market.
Rent growth was stronger than expected in the second quarter given the economic slowdown and weaker wage growth. "That's giving landlords more power than we'd normally expect to see in the cycle," says Sam Chandan, chief economist at Reis.
Rents climbed 1.1% in the second quarter, off the 1.3% growth in the same quarter last year, according to Reis. The apartment vacancy rate remained unchanged from the previous quarter at 5.9%. Four of 79 markets Reis tracked showed negative rent growth, all in regions hit by big home-price declines: Miami; Palm Beach, Fla.; Ventura County, Calif.; and Detroit.
"Rental demand hasn't really picked up in relation to the falling home sales, which implies that people are doubling up or tripling up or moving back with their parents," says Lawrence Yun, chief economist for the National Association of Realtors. He expects that to change in the near-term, in part because "it's not sustainable to keep adding roommates."
Analysts have been predicting the oversupply of housing will provide a shadow market into 2009 for the most overbuilt markets. But the Reis data showed signs of recovery in some of those regions: Apartment vacancies fell in Fort Lauderdale, Fla., and San Bernardino, Calif., which also posted a 1.1% increase in rent. Rents gained 1.5% in Orlando, Fla. Denver posted the, strongest rent growth nationally at 1.9%.
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