In-line Retail Rental Rates on the Rise

By Ryan Chittum
From The Wall Street Journal Online

A strong fourth quarter helped boost the strip-mall sector to its best year since 2000, but the shopping-mall market posted mixed results.

Rents rose moderately in the U.S. mall and strip-mall sectors in the fourth quarter, while vacancies edged up in both, according to a survey. But the similarities end there for 2005, which was the best year for strip malls since 2000, while the shopping-mall market was essentially flat.

Shopping malls can be more susceptible to downturns in the economy and changes in consumer taste than their strip-mall cousins because they put more emphasis on discretionary items; strip malls tend to have more stores selling nondiscretionary items and are less affected by slips in consumer sentiment.

The shopping-mall vacancy rate tiptoed up to 5.5% in the fourth quarter from 5.4% in the third quarter, according to a quarterly survey of the top 67 U.S. markets by Reis Inc., a New York-based real-estate research firm. Asking rents moved up 0.5% to $38.27 per square foot per year in the last quarter, from $38.08 in the third quarter. The 5.5% mall vacancy rate at the end of 2005 was slightly higher than the 5.3% logged at the end of 2004. Rents were up just 1% for the year, putting their two-year gain at an anemic 0.9% after a 0.1% decline in 2004.

Asking rents at strip malls, on the other hand, gained a solid 3.2% in 2005, their best showing in five years. While the strip-mall vacancy rate crept down to 6.8% at the end of 2005 from 7% a year earlier, absorption -- the net change in occupied space -- was strong at 30.3 million square feet, also the best showing in five years.

For the quarter, average rents in strip malls were up 0.9% to $18.41 a square foot from $18.24 in the third quarter. Absorption was strong at 8.6 million square feet, but a stepped-up construction pace lifted vacancies to 6.8% in the fourth quarter from 6.7% in the previous period.