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Shopping Center Industry’s Pace of Decline Accelerates in First Quarter

The U.S. shopping center industry experienced rapid deterioration in real estate fundamentals during the first quarter, according to preliminary data released Tuesday by real estate research firm Reis.

Negative net absorption of 8.7 million sq. ft. plagued neighborhood and community centers during the first three months of 2009. That figure was largely responsible for the vacancy rate in this segment rising from 8.9% in the fourth quarter of 2008 to 9.5%.

“In comparison to what was already a tough 2008, neighborhood and community centers returned more space to the market in the first quarter of 2009 than all of the four quarters of 2008 combined,” wrote Victor Calanog, director of research for New York-based Reis. During 2008, neighborhood and community centers posted negative net absorption of 8.6 million sq. ft.

Both asking and effective rents experienced sharp declines as an increasing number of tenants either downsized their space needs or went out of business altogether. The average effective rent — what tenants actually pay — dropped 1.8% at neighborhood and community centers on a quarter-over-quarter basis to $17.11 per sq. ft.

It was the single largest quarterly drop on record, according to Reis, which has been tracking this shopping center segment since 1980. Effective rents fell in 74 out of 76 markets tracked by Reis, reflecting the broad-based decline. Meanwhile, asking rents fell 0.6% quarter-over-quarter to $19.44 per sq. ft.

Unless conditions change dramatically, Reis projects a continued rise in vacancies and a decline in asking and effective rents for neighborhood and community centers through 2011. “Individual consumers remain worried about their asset bases. Home values and retirement accounts are still reeling,” wrote Calanog.

Compounding the problem is the weak labor market. Job losses in the first quarter continued to mount, with non-farm payrolls dropping 663,000 in March alone. Against that backdrop, “there is little current basis for any optimism required to maintain or increase spending, and therefore keep retail businesses afloat,” according to Calanog.

The first-quarter results for regional and super regional malls also are cause for concern. The vacancy rate spiked 80 basis points from 7.1% in the fourth quarter to 7.9% in the first quarter. That’s the largest rise in vacancy for a single quarter since the fourth quarter of 2001. The average asking rent for non-anchor tenants declined 1.2% on a quarter-over-quarter basis to $39.99 per sq. ft.

“Reis does not generate forecasts for regional malls,” Calanog concluded, “however our outlook for the retail sector in general is bleak given the factors outlined in the analysis for neighborhood and community centers.”

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