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Grocery Anchored Centers Get Squeezed

Owners and operators of neighborhood and community centers are unexpectedly bearing the brunt of escalating energy and food prices.

The shopping center sector, typically anchored by supermarkets, drug stores and discount stores, has long been touted as recession-proof, because its tenants sell life's essentials. However, that thesis is being severely tested today.

Asking rents at shopping centers rose just 0.4 percent during this quarter, the smallest increase in seven years, according to Reis Inc. And effective rents grew just 0.1 percent. That's a marked slowdown from a year ago when asking rents grew 0.9 percent and effective rents rose 0.8 percent during the first quarter. Meanwhile, the national vacancy rate continued to march upward, rising 20 basis points during the first quarter up to 7.7 percent, its highest rate in more than a decade.

Compounding the pressure on landlords are tenants who are demanding rent reductions, even in primary markets. A year ago, they would take any space they could find. Today, national chains are requesting as much as $2 per square foot off asking rents and delaying openings until next year, or even 2010, says Steve Ewing, vice president with Staubach Retail, an Addison, Texas-based commercial real estate advisory firm. Other concessions include increased tenant improvement allowances and periods of free rent.

Still, there's no consensus in the market as to what makes a fair deal. Landlords have been pushing back against concessions. As a result, negotiations can take twice as long, up to four months or longer for a lease, says John Bemis, executive vice president and director of leasing and development with Jones Lang LaSalle, an Atlanta-based third party retail management firm.

In particular, in smaller suburban areas, "for rent" signs are hanging in store windows for months without attracting much interest, says J. Scott Fawcett, principal with Marinita Development Co., Inc., a Newport Beach, Calif.-based developer and property manager. And, with the slow leasing market, developers have postponed opening dates for new shopping centers and scaled-back the size of their projects.

"Leasing for the mom-and-pops has virtually dried up," says Fawcett. "I ask the brokers whether they get any phone calls [on the smaller spaces] and they say very, very few." On the other hand, Fawcett says, "national tenants are still doing transactions, but it's taking longer and longer for them to get approvals."

Things may stay like this for a while. Robert Bach, chief economist with Santa Ana, Calif.-based commercial real estate services firm Grubb & Ellis, thinks it will take 10 to 12 months before the economy begins to recover. As a result, demand for space will remain low.

"If we are in a recession, shopping centers will not be immune from the downturn," Bach says. "We have rising gas prices, slumping housing prices and consumers can't take equity out of their homes anymore. The labor market has been one of the main props holding up the retail market, but it got seriously wobbly in the first quarter; so recent numbers don't surprise me."

Another problem is that there is 125 million square feet of new retail construction scheduled to come online this year, according to national brokerage firm Marcus & Millichap Real Estate Investment Service. That glut of space will put more downward pressure on rents.

Bemis and Bach project the national vacancy rate and rental rate will stay flat through the end of 2008. But Bemis admits the leasing environment has changed in the past year.

"The message that I've been preaching to our leasing people is in the past, we've always gotten our fair share of deals," he says. "In 2008, we can't be satisfied with that anymore--we have to get more than our fair share."

--Elaine Misonzhnik

TAGS: Leasing Retail
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