Vacancies Surge in Malls and Shopping Centers in America's Exurbs

Malls Face Surge in Vacancies

Fallout From Boom and Downturn, Change in Habits, Hit Local Shopping Areas

April 7, 2011

Wall Street Journal - Even as the economy picks up steam, many of the nation's malls and shopping centers are suffering a hangover due to changing consumer habits and the fallout from a massive building boom.

Mall vacancies hit their highest level in at least 11 years in the first quarter, new figures from real-estate research company Reis Inc. showed. In the top 80 U.S. markets, the average vacancy rate was 9.1%, up from 8.7%.

The outlook is especially bad for strip malls and other neighborhood shopping centers. Their vacancy rate is expected to top 11.1% later this year, up from 10.9%, Reis predicts. That would be the highest level since 1990.

In 2005, the mall-vacancy rate hit a low of 5.1%. For strip centers the boom-time low vacancy rate was 6.7% that same year.

Not all retail properties have suffered as much, especially on the high end. Large, publicly traded mall owners like Simon Property Group Inc. and Taubman Centers Inc., which tend to own top-tier properties, have trimmed their vacancy rates to 7% or lower and lifted their lease rates in the past year, buoying their stock.

But a broader glut has struck some of the exurbs that saw heavy housing development during the boom, where malls and strip centers built for growth that never came. More than one billion square feet of retail space was added in the 54 largest U.S. markets since the start of 2000, according to CoStar Group's Property & Portfolio Research Inc. of Boston.

In part, the decline reflects a continued drag on spending from the recession. But many retailers that had been stalwart mall- and strip-center tenants, like Borders Group Inc. and Blockbuster Inc., have floundered. Even successful chains have closed and shrank hundreds of stores as they retrenched.

Additionally, the recession appears to have speeded a shift in habits that has more Americans shopping online. Online retailing surged to 12% of the total during the holidays.

"We will hit a tipping point soon, if we have not already, where online will become so mainstream that retailers will wonder what they need some of these big boxes for, when you have a retail presence in everyone's pocket via your smart phone," said Leon Nicholas of retail consultancy Kantar Retail.

In some towns, city officials are looking for ways to revive, or even redeploy, mall space.

In the Denver suburb of Westminster, Colo., city officials are negotiating to buy and raze the 34-year-old Westminster Mall and redevelop it into offices, homes and stores. The 1.2-million-square-foot mall, once home to a Macy's, Trail Dust Steak House and Mervyn's, has seen its sales-tax generation plummet in recent years, to $1.5 million last year from $8.5 million in 2000, city officials say.

"What is regrettable from the city's standpoint isn't just the loss of sales tax revenue, but more importantly than that it is the loss of a significant activity center and gathering place for the city," said Brent McFall, Westminster's city manager. The mall went "from a place that was once vibrant to something that is now virtually vacant."

Officials in North Plainfield, N.J., are trying to prop up a 219,000-square-foot strip mall whose Kmart closed on Sunday, boosting its vacancy rate above 50%. That's a threshold that puts many shopping centers into a death spiral. The center also has lost a Pathmark grocery store, Ruby Tuesday and J.P. Morgan Chase & Co. bank branch.

Borough officials are looking into ways to ease building codes and may seek tax abatements to help the landlord, Vornado Realty Trust, attract a new tenant.

"It's a gateway to the town," said Frank Stabile Jr. head of North Plainfield Economic Development Committee.

Vacancies and falling rents have especially hurt strip centers. Some regional grocers have been clobbered by the downturn and new competition from big box stores like Wal-Mart, hurting strip centers anchored by their stores.

The Great Atlantic & Pacific Tea Co., the onetime retail goliath that had shrunk into a northeastern supermarket chain operating grocery stores such as A&P and Pathmark, sought bankruptcy protection in December and said last month it was closing 32 stores.

Some landlords have hedged against the impact of online shopping by adding more tenants like restaurants, entertainment venues, fashion stores and other wares not often bought online. Longtime strip center tenants like dentists and tax preparers are even more coveted now.

But many small businesses typically housed in strip centers have been particularly hurt by the weak economy.

"The ongoing challenge is there is very little capital for those small businesses to expand and open new stores," said Jim Sullivan, a retail-property analyst with Green Street Advisors. "Until that capital arrives in a meaningful way, strip-center vacancies are likely to remain stubbornly high."

See: Our 'New Way of Life' Will Depend a Whole Lot Less on Home and Automobile Ownership as People Move from Suburbs to Denser Urban Communities