For mall owners and operators, the business environment is good. The vacancy rate for shopping malls remained at the lowest point in 3½ years in the first quarter, leveling off at 5.3 percent, according to the survey of the top 62 U.S. markets by Reis Inc., a New York-based commercial real-estate research firm.
But the mall industry, which soared through the economic downturn and stock-market crash on the strength of the seemingly imperturbable U.S. shopper, remains vulnerable to any slowdown in consumer spending.
Mall rents edged down 0.4 percent in the first quarter to $37.75 per square foot per year from $37.89 a square foot in the fourth quarter of 2004. The first quarter is usually a shakeout period in the retail industry as some retailers who hung on through the holiday shopping season cut costs or go out of business. It was the fifth straight year that rents fell in the first quarter, but the bankruptcy season was light compared with last year, when rents tumbled 1.2 percent in the first quarter.
The vacancy rate in strip malls edged up to 6.9 percent in the first quarter from 6.8 percent in the fourth quarter as "absorption" — the net change in occupied space — slowed to 3.2 million square feet in the first quarter compared with nine million in the previous quarter. But rents were up 0.6 percent to $18.09 a square foot in the first quarter from $17.98 a square foot in the fourth quarter.
Part of the reason why mall landlords are doing so well despite inconsistent job growth and cooling consumer confidence is retailers' belief that if they continue to build stores, shoppers will come.
Also adding to the uncertainty in retail real estate is the wave of consolidation in department stores. The three recent big retailing deals— Kmart Holding Corp. merging with Sears, Roebuck & Co. to form Sears Holding Corp., Federated Department Stores Inc. merging with May Department Stores Co. and the sale of Toys "R" Us Inc. — all were based in part on the underlying value of the companies' real-estate assets. With other department stores, including Saks Inc. and Neiman Marcus Group Inc. considering putting all or part of their operations on the market, landlords could see a significant amount of empty anchor space at once as the companies close underperforming stores or rejigger their formats.
Still, retail real estate has outperformed the other sectors of commercial real estate in the past five years and the high barriers to entry in building shopping malls means supply is flat or even shrinking. Construction of strip malls, meanwhile, is expected to top 29 million square feet this year, about 17 percent more than was built in 2004, according to Reis.
