Bolstered by continued-strong consumer spending, the vacancy rate in shopping malls hit its lowest level in three-and-a-half years, falling to 5.3 percent in the fourth quarter from 5.5 percent in the previous one, according to the survey of the top 62 U.S. markets by Reis Inc., a New York-based commercial real-estate research firm.
Rents rose 0.8 percent to $37.89 per square foot per year in the fourth quarter from $37.60 a foot in the third quarter. That marked the third-consecutive quarter that rents rose or remained flat and vacancies declined.
Rents still haven't caught up to their late-2003 levels after a rough start to 2004, when several large retailers, including KB Toys Inc., Footstar Inc. and Gadzooks Inc. filed for bankruptcy-law protection, closing hundreds of stores. Struggling retailers typically try to hold on through the holiday shopping season, hoping it will be enough to help them survive, and the first quarter of the year usually sees the most retailer bankruptcies. Rents fell 1.2 percent in the first quarter of 2004 and were down 0.1 percent for the year.
Analysts aren't expecting a rash of serious bankruptcies this year, though the uncertainty surrounding Toys "R" Us Inc.'s effort to sell itself, the effect of the merger of Kmart Holding Corp. and Sears, Roebuck & Co. and the reported merger talks between Federated Department Stores Inc. and May Department Stores Co., could have a serious effect on malls and strip malls depending on how many stores close and when.
Still, with demand for space high, both sectors are well-positioned to withstand any disruptions, said Greg Andrews, an analyst with Green Street Advisors, a real-estate research firm based in Newport Beach, Calif.
The strip-mall sector continues to show strength, with vacancies down to 6.8 percent in the fourth quarter from 6.9 percent in the third quarter on strong absorption — the net change in occupied space — of nine million square feet, the most in four years. Rents were up 0.7 percent to $17.98 per square foot per year in the fourth quarter from $17.85 a foot in the third quarter.
For 2004, strip-mall rents were up 2.9 percent, just above the 2.8 percent increase posted in 2003, said Jon Garfield, an analyst with Reis.
Overall, the retail sector continues to outperform its office and apartment cousins, as consumers have maintained and increased spending throughout the economic downturn and the recovery. Same-store retail sales, a key industry measure, were up 2.7 percent in December over the year before, and that was weighed down by a weak showing by department stores, where same-store sales were up just 0.6 percent, according to the International Council of Shopping Centers, a New York-based trade group. For 2004 as a whole, same-store sales, which measures sales at stores open at least one year, were up 3.8 percent, the biggest gain since 2000.
