Strip mall owners struggle with lack of demand in second quarter

U.S. strip mall owners struggled with a lack of demand in the second quarter, although limited construction of new space led to a modest improvement in vacancy rates and slightly higher rents, according to a report released on Wednesday.

The national vacancy rate dropped to 10.5 percent last quarter from 10.6 percent the previous period, according to the report by real estate research firm Reis Inc. It was the sixth time in the last seven quarters that the rate dropped by one-tenth of a percent, with declines driven largely by a dearth of new construction.

The average asking and effective rents both rose 0.3 percent, as demand just barely exceeded the 914,000 square feet of new space made available.

"People look at the market and say: 'These buildings are sitting 10 percent vacant or so, why are we going to build something new?'" said Ryan Severino, a senior economist at Reis.

Altogether, retailers soaked up 2.453 million square feet of U.S. neighborhood strip centers - shopping centers typically anchored by grocery stores or drug stores. That was down from 2.959 million square feet during the first quarter.

Asking rent at the end of the quarter was $19.19 per square foot per year. Effective rent, which strips out free rent and other costs landlords incur to attract tenants, was $16.68 per square foot.

Regional malls, where department stores typically book-end smaller specialty stores, had a vacancy rate of 8.3 percent in the second quarter, flat compared with the prior period.

Top-tier malls in affluent areas are driving improvements in vacancy rates and asking rents as smaller shopping centers continue to suffer from weakness in the economy, Severino said. The top nine markets ranked by lowest vacancy rate are in California or the New York area suburbs, a trend that aligns with "Class A" malls outperforming inferior malls, he said.

"There's a pretty big rift in the high-end centers that cater to the affluent and the other centers that cater to everyone else," said Severino. "The wealthy are not immune to the economy, but they're definitely more insulated."

Real-estate companies that own malls and shopping centers in denser metropolitan areas and wealthier suburbs include Simon Property Group Inc, General Growth Properties Inc, Taubman Centers Inc, Kimco Realty Corp and Equity One Inc.

(Reporting by Lauren Tara LaCapra. Editing by Andre Grenon)