Retail Rents on Rise as Space at a Premium - WSJ Article

Retail Rents on Rise as Space at a Premium

Low Vacancy Rates at Malls, Strip Centers Give Landlords Leasing Leverage

By

Kris Hudson

connect

Updated July 3, 2014 6:25 a.m. ET

Shopping-center owners continued to increase rents in the second quarter as a host of retailers in expansion mode jockeyed for dwindling available space in existing high-quality centers.

Vacancy rates at U.S. malls and strip centers remained minimal in the second quarter such that retailers seeking to move into the best centers often must wait for another tenant to leave. Landlords and analysts generally don't expect a significant pickup in retail construction for at least a year or two.

Vacancies at strip centers declined to 10.3% in the second quarter, down 0.10 percentage point from the first quarter and now nearly a percentage point lower than a postrecession high set in the third quarter of 2011, according to data from Reis Inc. At malls, vacancy remained at 7.9% for the third consecutive quarter, down from a high of 9.4% set in the third quarter of 2011.

Meanwhile, the shrinking vacancies allowed retail landlords to raise rents at malls for the 13th consecutive quarter and at strip centers for the 11th. Rents at malls rose 0.4% in the second quarter to $40.32 a square foot a year, while rents at strip centers rose 0.5% to $19.51. Strip centers are rows of small shops often sharing a common parking lot.

"This is the continuation of a slow, but decidedly upward trend in quarterly rent growth over the last few years," said Ryan Severino, a senior economist at Reis, which compiles its data from 77 U.S. metropolitan areas.

Vacancy rates are even tighter in the highest-quality shopping centers, which typically are owned by real-estate investment trusts rather than individual, private investors. Cedrik Lachance, a managing director at Green Street Advisors, which tracks REITs, estimates the vacancy rate in top-quality, REIT-owned strip centers to be roughly 5%.

"We're over 95%-leased in our total portfolio," said John Kite, chief executive of Kite Realty Group, an Indianapolis-based firm that owns more than 130 centers across the U.S. "That's as good as it's been in the past 10-plus years. The retailers that are expanding have limited choices, which is why we're driving rents up."

The short supply of shopping-center space stems from several factors. While retailers such as specialty grocers and discount merchandisers are expanding, there isn't enough expansion overall for lenders to justify financing many new projects. Meanwhile, retail sales have been sluggish this year; sales growth, excluding auto sales, increased by 0.1% in May from April, according to the Commerce Department.

Retail landlords say that plenty of retailers are expanding, led by specialty grocers such as Whole Foods Market Inc. and Trader Joe's, sports and outdoors stores, discount apparel sellers, dollar stores and medical offices. The roster of shrinking retailers is the same that has been whittling store counts for the past two years: electronics retailers, booksellers, office-supply chains and toy sellers.

"We don't see the new-supply dynamic changing anytime soon," said Shane Garrison, chief operating officer and chief investment officer of Retail Properties of America Inc., which owns roughly 230 properties across more than 70 U.S. markets. "So it's definitely a landlord's market again."

As an example of the changing U.S. retail landscape, Kite Realty accommodated Staples Inc. by reducing its square footage at Kite's International Speedway Square shopping center in Daytona Beach, Fla. Kite halved Staples' square footage there to 12,000 and moved a new tenant, Total Wine & More, into Staples' vacated space in the second quarter.

In the Henry Town Center near Atlanta, Retail Properties of America replaced a 115,000-square-foot wholesale-club retailer with three tenants this year: Gander Mountain Co., Gap Inc.'s Old Navy and a TJX Cos. Home Goods store soon to open.

CoStar Group, a real-estate research firm, predicts that builders will complete 45.2 million square feet of retail space this year and 71.5 million square feet in 2015 in 63 U.S. markets. That is well shy of the 210 million square feet delivered in 2007.

"We'll see a moderate increase in the coming quarters in construction," said Suzanne Mulvee, a director of retail research at CoStar. "But it's going to be a couple of years before we see construction getting back to even half the pace of what it was in 2007."

β€”Ben Leubsdorf contributed to this article.