Slowing Sales Foretell Weakening
Despite Rise in Mall Rents
by Ryan Chittum
From The Wall Street Journal Online
July 31, 2006
Rents at shopping malls rose in the second quarter at their fastest clip in nearly three years, and strip malls posted solid increases as vacancies decreased in both sectors, a survey shows.
But weakening second-quarter retail sales have damped growth and could slow it further in later quarters as economic pressures squeeze consumers. For the second straight quarter, absorption -- the net change in occupied space -- showed signs of weakness. Tenants absorbed 4.9 million square feet in the period, up from 3.3 million in the first quarter, but well below the two-year average of about seven million square feet per quarter.
Retail sales moderated due to a variety of pressures, from high energy prices to rising interest rates and a slowdown in the once-booming housing market.
Strip malls benefited from a lull in new centers opening. While 4.8 million square feet of new space opened in the quarter, space of 10.8 million feet is set to come on line in the fourth quarter.
"New construction this year particularly is back-loaded to the end of the year," said Lloyd Lynford, chief executive of Reis. "Investors would do well to be monitoring impact of that construction," particularly in markets like San Bernardino/Riverside, Calif., where 1.7 million square feet of new strip-mall space has opened so far this year -- a huge amount considering 8.6 million square feet has opened in the rest of the country during the same period.
Still, strip-mall rents rose 0.9% to $18.65 a square foot from the first quarter. Shopping-mall rents rose 1% to $38.89 a square foot, the survey showed -- the biggest quarterly rise in nearly three years.
Retail real estate has performed well in the past five years compared to apartments, offices and industrial, which were hit hard by the recession. While the other commercial real-estate sectors are improving sharply, retail has less upside now since it didn't decline like the others during the downturn.
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