New York, NY, January 27--The nation's retailers added space in the fourth quarter, pushing down vacancy rates in malls and strip malls while driving rents almost 1% higher, according to a new survey.
Bolstered by continued strong consumer spending, the vacancy rate in shopping malls hit its lowest level in three-and-a-half years, falling to 5.3% in the fourth quarter from 5.5% in the previous one, according to the survey of the top 62 U.S. markets by Reis Inc., a New York-based commercial real-estate research firm.
Rents rose 0.8% to $37.89 per square foot per year in the fourth quarter from $37.60 a foot in the third quarter. That marked the third-consecutive quarter that rents rose or remained flat and vacancies declined.
Rents still haven't caught up to their late-2003 levels after a rough start to 2004, when several large retailers, including KB Toys Inc., Footstar Inc. and Gadzooks Inc. filed for bankruptcy-law protection, closing hundreds of stores. Struggling retailers typically try to hold on through the holiday shopping season, hoping it will be enough to help them survive, and the first quarter of the year usually sees the most retailer bankruptcies. Rents fell 1.2% in the first quarter of 2004 and were down 0.1% for the year.
Analysts aren't expecting a rash of serious bankruptcies this year, though the uncertainty surrounding Toys “R”Us Inc.'s effort to sell itself, the effect of the merger of Kmart Holding Corp. and Sears Roebuck & Co. and the reported merger talks between Federated Department Stores, May Department Stores, could have a serious effect on malls and strip malls depending on how many stores close and when.
Still, with demand for space high, both sectors are well-positioned to withstand any disruptions, said Greg Andrews, an analyst with Green Street Advisors, a real-estate research firm based in Newport Beach, Calif.
The strip-mall sector continues to show strength, with vacancies down to 6.8% in the fourth quarter from 6.9% in the third quarter on strong absorption -- the net change in occupied space -- of nine million square feet, the most in four years. Rents were up 0.7% to $17.98 per square foot per year in the fourth quarter from $17.85 a foot in the third quarter.
For 2004, strip-mall rents were up 2.9%, just above the 2.8% increase posted in 2003, said Jon Garfield, an analyst with Reis.
Overall, the retail sector continues to outperform its office and apartment cousins, as consumers have maintained and increased spending throughout the economic downturn and the recovery. Same-store retail sales, a key industry measure, were up 2.7% in December over the year before, and that was weighed down by a weak showing by department stores, where same-store sales were up just 0.6%, according to the International Council of Shopping Centers, a New York-based trade group. For 2004 as a whole, same-store sales, which measures sales at stores open at least one year, were up 3.8%, the biggest gain since 2000.
Looking ahead to this year, analysts see the retail real-estate market flattening out. "I think things can get a little better, but I think we're running out of room for more occupancy gains," Mr. Andrews said. Reis projects new strip-mall construction of 28.5 million square feet for 2005, about 17% more than was built in 2004. That will push vacancy rates up slightly to 7% by the end of the year, Mr. Garfield said.
