Thursday, October 8, 2009

Retail Vacancies Hit Multiyear Highs

By KRIS HUDSON, Wall Street Journal

When consumers start their holiday shopping in earnest next month, they will find fewer stores competing for their business as vacancy rates at malls and shopping centers have risen to multiyear highs.

According to Reis Inc., a New York real-estate research firm, 10.3% of the retail space at U.S. shopping centers -- open-air centers typically anchored by a grocery store or big-box retailer -- was vacant in the third quarter. That was up from 8.4% in the same period a year earlier and was the highest vacancy rate since 1992. At enclosed malls, the vacancy rate rose two percentage points to 8.6%, the highest rate since Reis began tracking mall data in 2000.

The hardest-hit retail properties were those completed this year. Of those, 30% opened half-empty or worse, according to Reis data, which cover the 77 largest U.S. markets.

Mall and shopping-center owners are reeling from two years of flat to declining retail sales and waves of store closures. Many are still trying to find tenants to fill hundreds of vacancies created by the closures last year and early this year of chains including Linens 'n Things Inc., Circuit City Stores Inc. and Gottschalks Inc. Meanwhile, the closures continue to mount, with chains such as Blockbuster Inc., Hollywood Entertainment Corp.'s Game Crazy, Zale Corp. and AnnTaylor Stores Corp. cumulatively closing more than 1,000 stores.

The Federal Reserve has tallied nearly 8,300 store closings announced by retailers so far this year, including more than 1,500 large anchor stores. Last year, the International Council of Shopping Centers, an industry trade association, counted 6,900 such announced closures. The next-highest annual total recorded by the trade association was 7,000 in 2001.

As demand for retail space plummeted, average retail lease rates continued to decline in the third quarter, down 3.7% to $16.89 per square foot for shopping centers and off 3.5% to $39.18 for malls. And the outlook for a recovery in the near future appears bleak. "We don't see rent levels in retail returning to 2008 levels until 2016," said Victor Calanog, Reis director of research.

Glenn Rufrano, chief executive of Centro Properties Group, which owns 610 U.S. shopping centers, said Centro has managed to find new tenants to occupy stores vacated by bankrupt retailers, but only after making concessions.

Relief won't come soon. Market-research company Retail Metrics Inc. predicts that the 31 retailers it tracks will report Thursday an average decline of 0.8% in September sales at stores open at least a year. That would mark the 13th consecutive month of same-store sales declines. In addition, the National Retail Federation trade group disclosed its prediction Tuesday that this year's holiday-season sales will amount to a 1% decline from last year's total. That is on top of a 3.4% decline last year from 2007 levels.

"If sales are flat, plus or minus, that won't be so bad, especially since our tenants are carrying lower inventories," Centro's Mr. Rufrano said. "What we're hoping against are big negative sales over Christmas."

Some retailers are holding off on expansion plans until they can see how many closures occur after the holiday season and how willing landlords might be to cut deals to fill that space. Shopping centers tend to suffer more vacancies than malls because they house more local tenants. "The better malls are still strong," said Larry Meyer, executive vice president at affordable-fashion retailer Forever 21 Inc., which has opened dozens of stores this year.

Write to Kris Hudson at