U.S. strip mall recovery stalls in the third quarter

The nascent recovery at U.S. strip malls stalled in the third quarter as retail sales struggled. But large regional malls continued to rebound, driven by top-quality malls with high-end department and specialty stores, real estate research firm Reis Inc said Thursday.

The retail real estate sector has been among the hardest hit in commercial property. At the mercy of consumer spending, the sector has reflected the diverse pressures and changes since the housing crisis began in 2007.

Strip malls and regional malls are both subsectors of retail real estate. Strip malls, which are usually anchored by grocery stores or drugstores, have faced more headwinds because they proliferated during the housing boom. Meanwhile, the recovery of regional malls - which are usually anchored by department stores, have food courts and specialty stores - appears to have continued. But it has been uneven, with upscale malls leading the charge and lower-quality malls trailing.

Stripping out gasoline and auto sales, consumer spending barely increased in August. That translated into lower demand for space at strip malls, where the recovery has been shallow.

"There's not a lot of momentum here. We still have a weak economy, weak labor markets," said Ryan Severino, Reis senior economist. "There's no income growth."

During the third quarter, a net 1.458 million square feet were leased at strip malls, down from 2.176 million square feet in the second quarter, according to preliminary by Reis.

With demand so low, there was little impetus for developers to build new centers. During the quarter only 569,000 square feet of new space were opened, the equivalent of one or two medium-sized properties. It was the second-lowest amount since Reis began tracking quarterly data in 1999.

Vacancy in the third quarter was flat with the second at 10.8 percent, slightly below the all-time high of 11.1 percent set in 1990 and far from the cyclical low of 6.7 percent set in the second quarter of 2005.

Asking and effective rents both grew by a minuscule 0.1 percent, a slowdown from 0.2 percent in the second quarter. The average asking rent was $19.05 per square foot in the third quarter. Effective rent, which factors in months of free rent and other perks landlords offer to lure tenants, was $16.57 per square foot.

On the other hand, the recovery in the large regional mall sector did not stumble during the third quarter. Vacancy fell to 8.7 percent from 8.9 percent in the second quarter. The vacancy rate has been as low as 5.5 percent in the third quarter 2007 but reached 9.4 percent a year ago.

The average asking rent grew by 0.3 percent, the same as the second quarter, to $39.24 per square foot. Reis does not track effective rent at regional malls.

Still, Class A malls, which typically boast luxury retailers and cater to affluent consumers, accounted for the majority of the improvement, Reis said. Landlords of Class A malls, such as Taubman Centers Inc , Simon Property Group Inc and General Growth Properties Inc , can choose from a line of retailers waiting to move to the stronger malls when a space opens.

But the rest of the country's malls, which sport more mainstream retailers and cater to more typical consumers, are grappling with vacant storefronts, ongoing store closures, and competition from online shopping.

"The better-quality malls are overall pulling the sector up," Severino said. "The inferior malls are not doing nearly as well."