Retail Vacancies and Rents Rise,
Pointing to Market Slowdown
The U.S. retail real-estate market showed signs of slowing in the third quarter as vacancies moved higher but it wasn't enough to damp rents, according to a new study.
The higher vacancies are likely to reinforce investor concerns that weaker consumer spending means retail real estate has peaked.
Shopping-mall rents rose 0.9% in the third quarter -- the fastest pace in two years -- to $38.08 per square foot per year from $37.75 in the second quarter, according to the survey of the top 67 U.S. markets, excluding New Orleans, by Reis Inc., a New York-based commercial real-estate research firm. The vacancy rate moved to 5.4%, up from 5.1% in the previous quarter.
Rents at strip malls were up 1% to $18.23 a square foot in the third quarter from $18.05 in the second quarter. The vacancy rate edged up to 6.8% from 6.7% in the second quarter as absorption -- the net change in occupied space -- slowed from its high second-quarter pace. Tenants absorbed 6.8 million square feet in the quarter, down from 9 million square feet in the second quarter.
In a potential sign of trouble in retail, 16 of the 67 markets surveyed had net decreases in occupied space at strip malls during the quarter as consumers appeared to pull back on spending, said Lloyd Lynford, chief executive of Reis. The total decrease in occupied space among the down markets was about twice the total decrease among down markets in the second quarter.
Also, the pace of strip-mall construction is picking up. This year, 31.5 million square feet are expected to be built, but Reis expects that to jump to 37 million square feet next year, causing the vacancy rate to edge up to 7.1% by the end of next year.
The vacancy increase in shopping malls came as retailers pulled back expansion plans because of expectations that consumer spending will be hurt by rising energy prices this winter, Mr. Lynford said. At strip malls, he said, "the combination of an upturn in supply at the exact time when challenges are emerging on the demand side spells more challenging times for investors … than they've seen in the last three or four years."
For now, the owners of retail real estate are doing well. Ross Smotrich of Bear Stearns said in a research note that funds from operations for shopping-mall stocks should rise an average 24.3% for the third quarter, the best of any real-estate sector.
Other signs of retail health are promising. Rents at stores on the top retail streets in the world have soared in the past year, according to a new survey of global rents by Cushman & Wakefield Inc., a New York-based commercial real-estate services provider. In the most expensive district in the world, New York's Fifth Avenue, rents surged 30% to $1,300 a square foot from $1,000 a year ago. That far outpaces second-place Causeway Bay in Hong Kong and third-place Avenue des Champs Elysées in Paris.
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