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Shopping Center Vacancy Rates Recovering from Downturn

Large enclosed malls are recovering from the downturn faster than strip shopping centers, a sign that malls are being hurt less by online retailing.

The vacancy rate of U.S. malls in the third quarter declined to 8.2% from 8.3% in the second quarter, according to new statistics released by Reis Inc., REIS -1.03% a real-estate data firm. Mall vacancy was 8.7% in the third quarter of 2012, said Reis, which tracks the top 77 markets in the U.S.

But the improvement hasn’t been as strong with shopping centers—typically open-air retail strips that face parking lots. The average national vacancy rate for neighborhood and community shopping centers held steady in the third quarter at 10.5% from the previous quarter, down from 10.8% in the third quarter of last year.

The national average asking rent at shopping centers was $19.25 per square foot, up just 1.5% from the recession low of $18.97 in 2011. The average asking rent for malls in the largest 77 U.S. markets rose to $39.77 per square foot in the third quarter, up 1.4% from the same quarter last year, according to Reis Inc.

Malls are recovering faster because people go to them for high-end retail, entertainment and dining. People are more likely to go to shopping centers, on the other hand, for basic consumer needs that they can also satisfy online, real-estate economists and executives say.

“If you’re more of a middle-income or lower-income household, you’ll probably be looking for deals online, and that directly translates into why malls are doing better,” said Victor Calanog, Reis’s chief economist.

Both malls and shopping centers were clobbered by the downturn. Mall vacancy rates are now falling partly because there has been little to no new mall development since 2006, Mr. Calanog said.

South Carolina-based Edens, which owns 114 centers, is making up for the contraction and closings of other tenants by focusing on fitness center operators like LA Fitness International and eateries such as Chipotle Mexican Grill Inc. CMG -0.17% and Le Pain Quotidien.

“We basically replaced those type of retailers with things that people can’t buy on the Internet, or people aren’t comfortable buying on the Internet,” said Terry Brown, Edens’s chief executive.

Malls, meanwhile, have seen an influx of luxury retailers. Aventura Mall, a 2.5-million-square-foot mall partly owned by Simon Property Group LP, the country’s largest mall operator, has done deals recently with Louis Vuitton and Cartier, according to Donald Soffer, whose company co-owns and manages the property.

To be sure, some traditional mall tenants also have been hurting. A July report by ICSC Research and PNC Real Estate Research said that of the 390 apparel-type store closings announced in the second quarter of 2013, 63.1% were concentrated in just five retailers, all mall staples. The retailers included Casual Male XL, Hot Topic, Torrid, Nordstrom Rack and Jones Group Inc., parent of clothier Jones New York and Nine West shoe stores.

But other brands are expanding in malls. The Japanese clothing store Uniqlo, for example, announced this week that it would open 10 new U.S. stores over the next two months, and 20 more in 2014.

“We call it retail Darwinism—it happens all the time that the shops that were once mighty but are now weak. Something new and exciting always comes along,” says Michael Glimcher, chief executive of Glimcher Realty Trust.

Source: Wall Street Journal, ROBBIE WHELAN October 2nd, 2013
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