Thursday, April 8, 2010

US retail properties suffer record vacancies

Vacancy rates at US shopping centres and malls rose to the highest levels in at least 10 years in the first quarter, accompanied by a drop in rents that wiped out years of growth, research firm Reis Inc said yesterday, adding that no improvement was likely soon.

‘Until we see stabilisation and recovery take root in both consumer spending and business spending and employment, we do not foresee a recovery in the retail property sector until late 2012 at the earliest,’ Reis director of research Victor Calanog told Reuters.

Still, prices for properties with good tenants have been rising, and Reis said stronger players such as Simon Property Group and Kimco Realty Corp have the wherewithal to not only survive but to make deals.

Simon, the largest US mall owner, is considering making a raised offer for bankrupt rival General Growth Properties Inc.

‘What the big players don’t want to do is jump in late at the party,’ Mr Calanog said. ‘They’re going to try to seal deals today when there’s still this perception that rents are going to go down.’

The fundamentals of rent and vacancy look dreadful. In the first quarter, the vacancy rate at big US malls hit 8.8 per cent, the highest since Reis began tracking the property type in 2000.

Asking-rent fell 0.6 per cent, the sixth straight quarter of decline. At an average of US$38.79 per square foot, the asking rent was the lowest in four years.

At local shopping centres, including strip malls typically anchored by grocery and drug stores, the picture was equally bleak.

Many neighbourhood shopping centres were built in anticipation of an ever-expanding housing market.

Markets such as Las Vegas, Nevada, and the Florida cities of Tampa, Orlando and Fort Lauderdale posted among the highest vacancy rates or greatest rent decreases.

Economically distressed areas such as the Ohio cities of Dayton and Cleveland also continued to suffer.

Unlike malls, local shopping centres were cheap to build and did not face nearly impossible permitting procedures. Many were built without having signed any tenants.

The decline in occupied space at local shopping centres pushed the first-quarter vacancy to 10.8 per cent, the highest since 1991, while asking-rent fell 0.3 per cent to an average of US$19.12 psf, the lowest level in three years.

Factoring in months of free rent and other costs that landlords kick in, effective rent fell 0.8 per cent, the real estate research firm said.

‘Concession packages are still perceived by landlords as an important tool to attract new tenants and retain existing ones,’ Mr Calanog said.

At US$16.62 psf, first-quarter effective rent was the lowest since the end of 2005, undoing the growth that occurred from that time through early 2008.

Reis said it expected the shopping centre vacancy rate to keep climbing and rent to continue to fall through 2011.

If job growth remains sluggish and consumer spending continues to be inconsistent, that will weigh on retail tenants for at least another 12-18 months, the real estate research firm said.

‘The retail tenant who plans to expand over the next year and open new stores will be the exception rather than the rule,’ Mr Calanog said.

Source: Business Times, 8 Apr 2010

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