US Battling Oversupply of Strip Malls

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Vacancy rates in U.S. strip malls continue to hover near all-time highs as the sector wrestles with an oversupply of space. 

The average national vacancy rate for strip malls remained at 10.5 percent in the third quarter, unchanged from the second quarter, and down 0.3 percent from last year, according to real estate firm Reis Inc. But the vacancy rate is still only 0.6 percentage point lower than record rate of 11.1 percent recorded by Reis in 2010.

Strip malls are defined as open-air centers usually anchored by supermarkets or large drug stores. 

"Retail is incredibly sticky," Reis chief economist Victor Calanog told Reuters. "I don't know what you do with these retail centers. As long as you're pulling in some money from existing tenants, a lot of them limp along."

The national asking rent at strip malls was $19.25 per square foot during the third quarter, an increase of just 1.5 percent from the recession low in 2011. Effective rent, which take into account free rent and other incentives, rose 0.4 percent to $16.75 per square foot, up 1.1 percent from a year earlier.

Given the numbers, developers are shying away from strip malls. Only 3.6 million square feet of new strip mall space has been delivered to the market year-to-date. The pace is on track to break the 32-year record low of 4.5 million square feet opened in 2010, according to Reuters.

Large U.S. malls are experiencing a better recovery. The vacancy rate dropped to 8.2 percent during the third quarter from 8.3 percent the previous quarter, down from 8.7 percent last year, reported Reis, which tracks the top 77 markets in the U.S.  

The average asking rent for malls rose to $39.77 per square foot during the third quarter, a 1.4 percent increase from last year. It marks the tenth consecutive quarter of national rent increases for regional malls, Reis reported.  

Large shopping malls are recovering faster because they offer high-end retail, entertainment and dining. Shopping centers, on the other hand, offer basic consumer needs which consumers can obtain online, experts say. 

"If you're more of a middle-income or lower-income household, you'll probably be looking for deals online, and that directly translates into why malls are doing better," Mr. Calanog said. 

Shopping center owners are taking notice of the online trend and are starting to make changes. 

"We basically replaced those type of retailers with things that people can't buy on the Internet, or people aren't comfortable buying on the Internet," chief executive Terry Brown of South Carolina-based Edens, who owns 114 centers, told The Wall Street Journal. The company is focusing on fitness center operators like LA Fitness International and restaurants such as Chipotle Mexican Grill.