Consumers Keep Driving
Shopping-Mall Boom

Consumers continued spending in the second quarter, which boosted the retail real-estate market and drove vacancies in shopping malls to four-year lows and pushed rents up solidly in strip malls.

Mall vacancies fell to 5.1% on average in the second quarter from 5.3% in the first quarter, but average rents were flat at $37.75 a square foot a year, according to the survey of the top 65 U.S. markets by Reis Inc., a New York commercial-real-estate research concern.

Strip-mall vacancies fell to 6.7% on average in the second quarter from 6.9% in the first quarter. Strip-mall rents rose 0.8% to $18.12 a square foot from $17.98 in the first quarter.

Absorption -- the net change in occupied space -- in strip malls was particularly strong in the second quarter, jumping by 8.7 million square feet, the second-biggest rise in 4½ years.

Retail has been the strongest sector in the commercial-real-estate industry, which in the past year has begun emerging from a three-year downturn that followed the recession and terrorist attacks of 2001. Consumers, buoyed by rising house values and low interest rates, kept spending through the downturn, helping retailers and their landlords emerge relatively unscathed.

Investors have noticed, bidding up the prices of malls and the market value of publicly traded real-estate investment trusts, which own much of the prime retail real estate. In the past four years, retail REITs as a group have more than tripled in value, according to SNL Financial, a Charlottesville, Va., research firm.

Deals have proliferated in the sector. Two months ago, Inland Western Real Estate Trust Inc., a nonlisted real-estate investment trust, purchased a portfolio valued at about $340 million from Starwood Capital Group investment funds. Inland will announce this week that it has purchased another portfolio, this one with 11 properties, for $430 million from Starwood Ceruzzi, a joint venture between Starwood Capital Group and Ceruzzi Holdings. There were 70 bids for it, including 15 for the entire portfolio, said Jeffrey Dunne, a vice chairman at CB Richard Ellis, the Los Angeles provider of commercial-real-estate services that handled the sale.

Money is flooding into the sector. Bidders were willing to pay more for properties when they were bunched into big portfolios than they were for the properties individually, Mr. Dunne said. "That tells you that people in this situation were willing to pay a premium for the efficiencies of putting a lot of capital out," he said. "The last time we saw this was when REITs were bulking up in '97-'98."

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