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Expert Q&A: Contextualizing the Fall

For each of the past 11 quarters, Reis Inc. has reported a rise in vacancy rates at neighborhood and community shopping centers. In addition, vacancies at regional malls jumped 30 basis points from the third quarter to the fourth quarter marking a three-year high in that segment. Retail Traffic asked Sam Chandan to talk about these trends.

RT: What's the significance of these rising vacancy rates?

Sam Chandan: The thing I want to stress is that we haven't seen a construction boom the way we did in the mid-1980s. Nor have we seen a large number of tenants disappearing. With neighborhood and shopping centers the spaces have opened up where developments were co-located or planned to open in concert with a greenfield housing development. Those projects have exhibited a higher vacancy rate than we'd normally see. They've had a harder time with leasing velocity and stabilization because the anticipated demand just hasn't been there.

RT: What about on the regional mall side?

Chandan: The rise in vacancy rates in regional malls in the fourth quarter is something we're concerned about…. Where we think it's appropriate to be concerned is how consumers are slowing down. This will be a factor in the market, even after economic growth picks up.

RT: How will this play out among different kinds of retailers?

Chandan: There are going to be subsets of retail that stand to do quite well. We saw that over the holidays, when folks got more careful with spending and Costco and Wal-Mart both did fairly well. Where I think we should be fairly concerned, as some leases come up, is if there is an issue with national chains that may not be able to weather the slowdown in overall activity. We'll have to watch as plans are adjusted, especially with anchor tenants or other large retailers…. Non-anchor tenants are going to hesitate if a large space at a property is empty.

RT: Is there a different outlook for mall retailers than neighborhood and community center retailers?

Chandan: At the end of the day people need to fill prescriptions and buy groceries. Those are things you're going to need to have access to irrespective of economic conditions. It's the [use of] discretionary dollars — in the ready-to-wear retail segment, for example — that is going to face challenges.

RT: Are you concerned about the pace of retail development?

Chandan: We have seen construction activity pick up, especially over the last year and a half. And completions are rising and at their highest point in over a decade. But it's still not anywhere near the peak we saw in the mid 1980s.… We're not seeing the kind of activity that could ultimately lead to dramatic deterioration in fundamentals much as what we saw happen in the late 1980s and early 1990s.

RT: What about the debt picture?

Chandan: The most positive trend is that what we do see in the market is that people are deeply concerned about how the transaction and debt side will perform over the next couple of years. And that's affecting how deals are getting priced and being underwritten.… It's a very proactive kind of anxiety over issues that might arise even before things deteriorate. That's better than if people were being overly optimistic and waiting for things to get worse before starting to act.

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