By KRIS HUDSON And A.D. PRUITT
Vacancies and lease rates at U.S. shopping centers continued to worsen in the second quarter, but the slowing pace of the deterioration hints at a recovery starting in the coming quarters.
Vacancies at large malls in the top 80 U.S. markets rose to 9% in the second quarter, up from 8.9% during the first quarter, according to real-estate research company Reis Inc. Mall vacancies have increased steadily for nearly four years as consumers reined in their spending and retailers closed stores and curtailed expansions.
Katie Orlinsky for The Wall Street Journal
Forever 21 is among the the few retailers to be in expansion mode, market observers say. To wit, above: a new Forever 21 department store in New York City.
Meanwhile, lease rates at U.S. malls fell for the seventh consecutive quarter, but the 0.2% decline in the second quarter to $38.72 per square foot was the smallest in that span.
The situation is similar for strip centers, which are smaller shopping centers generally anchored by grocery stores or big discount retailers like Wal-Mart Stores Inc. Vacancies at U.S. strip centers rose to 10.9% in the second quarter, up from 10.8% in the first. That rate is the highest Reis has tallied since 1991.
Lease rates at strip centers declined by half a percentage point to $16.58. That rate of decline is the smallest since strip-center lease rates began to fall in 2008.
"Overall, the news is still bad but not as bad as 2009," said Victor Calanog, Reis's director of research. "We're seeing little glimmers of recovery."
Specifically, Reis found 11 markets in which lease rates rose, mainly smaller markets with few new centers opening, including Pittsburgh and Cincinnati.
And vacancy rates declined in 31 markets, such as Las Vegas; Orange County, Calif.; and Northern New Jersey. Last year, in contrast, nearly all markets registered rising vacancies and falling lease rates.
What's more, retailers are showing sales gains. Thomson Reuters forecasts that the 88 retailers it tracks will post a mean 2.5% gain in the second quarter for sales at stores open for at least a year. By comparison, those retailers posted a 3.9% decline in the same quarter last year.
Even so, it likely will take several more quarters for the entire retail-property market to turn the corner. Retail property tends to reflect economic shifts more slowly than do other property types because retail leases typically span longer terms, often 10 years. In addition, the retail-property sector added more new supply in the boom than did other property types, exacerbating vacancies and lease-rate declines.
Reis forecasts that, across the 80 markets it tracks, the average vacancy rate won't begin to decline until 2012 and won't match its 2008 lows until 2016.
Greg Schuster, a senior vice president specializing in retail for brokerage Cassidy Turley in St. Louis, said lease rates won't improve until the broader economic recovery builds momentum. "Unemployment is going to have to come down and consumer confidence is going to have to rise," he said.
Retail landlords report that the leasing market remains challenging but has improved slightly from recent quarters. Many retailers are focused on bolstering their existing stores rather than opening new ones.
"Retailers are opening fewer stores so generally they can choose where the want to be," said Michael Glimcher, chief executive of Glimcher Realty Trust, which owns stakes in 23 U.S. malls.
Those still expanding include discount and value retailers such as dollar stores, Ross Stores Inc.'s Ross Dress for Less, Forever 21 Inc. and TJX Cos.' TJ Maxx. Among those cutting back are Blockbuster Inc. and Barnes & Noble Inc.
"The dollar stores are very good for us because they are taking more space," said Leo Ullman, chairman and chief executive of Cedar Shopping Centers Inc., which owns 119 strip centers. "The supermarkets are rolling out new stores often with smaller [sizes] in secondary markets."
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