Vacancies Fall Rents Up at Malls and Shopping Centers

U.S. malls and shopping centers saw vacancy rates fall and rents tick up during the first quarter, as construction in the retail sector was muted.

Asking rents at strip and enclosed malls increased by 0.5% in the first quarter from the prior quarter, according to real-estate research firm Reis Inc. Shopping-center asking rents are up 1.9% from a year ago, while mall asking rents are up 1.8% annually.

The average vacancy rate for shopping centers fell to 10.1% from 10.4% a year earlier. Shopping centers have struggled to fill retail space since the downturn. Vacancy rates peaked at 11% in 2010 and haven’t fallen meaningfully since then.

Malls, on the other hand, have recovered considerably more quickly. Vacancy rates at regional malls fell to 7.9% in the first quarter from their peak of 9.4% in the third quarter of 2013, according to Reis.

Part of the divergence in recovery has to do with supply, according to Ryan Severino, a senior economist for Reis. There was a surge in shopping-center construction before the downturn and the market has had trouble absorbing that space with new retail leases. Mall construction, by contrast, has fallen dramatically over the past two decades.

Another issue is competition, said Mr. Severino. Consumers have more options for where to buy the items available at strip centers, including the Internet, outlet centers and downtown shops.

“Demand has kind of splintered,” Mr. Severino said. “When it comes to neighborhood and community centers, they’re often selling more mundane products. You don’t find a lot of Gucci stores in those centers.”

Rick Caruso, a real-estate investor who owns 10 open-air shopping centers in Southern California, including The Grove in Los Angeles and The Americana at Brand in Glendale, said rents are rising in large part because online retailers like eyeglasses shop Warby Parker, apparel maker Bonobos and others are seeking a physical presence in shopping centers to showcase their products.

He said Caruso Affiliated, his development firm, has a list of two dozen of these so-called e-tailers seeking brick-and-mortar spaces in his centers.

“We’re pushing up rents across the board, but only when we can have a healthy retailer,” Mr. Caruso said. “Retailers are just more bullish right now.”

Source: Wall Street Journal ROBBIE WHELAN April 3, 2015 12:01 a.m. ET

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