Demand for space in U.S. strip malls still weak in first quarter

Limited supply of new U.S. strip malls helped offset weak demand for space in the first quarter, easing the national vacancy rate to 10.6 percent from 10.7 percent the prior quarter, according to a report released on Thursday.

With retail sales struggling to recover and muted demand for space, new construction for neighborhood strip centers remained near record low levels during the quarter, according to the report by real estate research firm Reis Inc.

Regional malls, where department stores typically book-end smaller specialty stores, continued to improve in the first quarter, but top-tier malls drove the lower vacancy rate and higher asking rents. Others continue to suffer from soft U.S. consumer demand and competition from online retailers.

The data adds to recent evidence that without a stronger labor recovery, the rebound of the U.S. economy continues at a glacial pace, rather than gaining momentum.

"Until the economy begins to create more and better jobs, retail sales will remain listless, demand will remain at low levels, and the vacancy compression will be slow and tedious," Reis economist Ryan Severino said.

The total square feet of U.S. neighborhood strip centers - shopping centers typically anchored by grocery stores or drug stores - rose by only 0.04 percent, or 873,000 square feet, in the first quarter, according to preliminary figures.

It was the fourth-lowest amount of space added since Reis began tracking the sector in 1999. The rise was smaller than the 1.231 million square feet added in the fourth quarter and was less than half the amount added a year ago.

The small amount of space added helped offset an anemic demand for space. Retailers soaked up only a net 2.726 million square feet of space, about the same as the prior quarter but down from a year earlier.

"It is somewhat heartening that demand did not collapse under the weight of tax increases and rising gasoline prices, but averting a collapse is not equivalent to surging demand," Severino said.

Still, it was enough to ease down the vacancy rate and eke out an increase in average rent by 0.3 percent. Asking rent at the end of the quarter was $19.18 per square foot per year. Effective rent, which strips out free rent and other costs landlords incur to attract tenants, was $16.63 per square foot.

Since the United States began to drag itself out of recession, the national vacancy for neighborhood strip centers is just half a point below the 1990 all-time high of 11.1 percent that was also reached in 2011. Vacancies remain well above their 2005 low of 6.7 percent.

Large regional malls continue to fare better. Their vacancy rate fell for the sixth straight quarter, down 0.3 points to 8.3 percent, the steepest decline in a decade. Average asking rent rose 0.4 percent to $39.46 per square foot per year, its best increase since 2008.

Reis attributes the higher rents and lower vacancies to the country's top-tier malls that attract the most traffic, with stores that rack up the highest sales per square foot.

The results for both strip centers and regional shopping centers reflect the income divide between the most affluent areas of the country and the rest, Severino said.

Affluent metro areas remain the tightest markets in the country. The top nine strip centers with the lowest vacancy rates are in California or the New York City suburbs.

Top-performing malls tend to be in stronger economic areas away from competitors. That bodes well for real estate companies that own malls and shopping centers, such as Simon Property Group Inc , General Growth Properties Inc , Taubman Centers Inc , Kimco Realty Corp and Equity One Inc , which have centers in denser metro areas and wealthier suburbs.