Deck the malls: Vacancies rise as holidays approach

Evidence of the impact is seen in a report out this month showing shopping mall vacancies hit an 11-year high in the third quarter.

Commercial real estate research firm Reis finds regional and super mall vacancies are up 9.4% in the three months ending Sept. 30 from 8.8% a year earlier. It marks the third quarter in a row of vacancy increases. More notably, it is the highest level since Reis began publishing the data in 2000.

Reis took inventory of space by surveying shopping mall property managers across the country. The data encompassed more than 600 million square feet — or about 40% of the nation's malls. Reis surveyed malls owned by both private owners and publically-traded Real Estate Investment Trusts (REITs). REITs own about two-thirds of the nation's mall space.

Nathan Isbee, who follows the shopping mall sector forStifel Nicolaus, is seeing a different picture. Overall, he finds regional mall fundamentals are healthy. In fact, he said mall REIT tenant quality is probably the highest it has ever been.

"We estimate that 90% of mall based sales are transacted in REIT owned malls, where occupancies have risen for the last few years — especially at high productivity malls." said Isbee. "The one exception is occupancy is declining at low quality malls. Retailers are taking a hard look at their space needs and are realizing that they don't need 'x' stores in a given market and can generate the same sales levels with two fewer stores. The recent Gap store closure announcement highlights this trend."

Isbee adds rent growth really depends on the quality of the mall.

He said leasing leverage has swung back in favor of the landlords and they have been able to start increasing rents as leases are renewed in the stronger shopping destinations.

Reis Senior Economist Ryan Severino acknowledges that REITs tend to own the highest quality malls in the inventory. So, he is not surprised to see others struggling more than what REITs are seeing.

"The middle of the retail market is really struggling. High-end luxury retailers aren't really having a lot of issues. The affluent aren't really suffering. If your bonus gets cut from $800,000 to $600,000, your quality of life won't be hurt so much," he said.

Over the past year or two, Severino said he has seen a proliferation of non-traditional tenants in some retail buildings. The tenants include government offices, schools and religious organizations. These tenants are capitalizing on depressed rents.

Britt Beemer, founder of consumer behavior research and strategic marketing firm America's Research Group, has also been seeing challenges at the nation's shopping malls. Beemer said many of them have been using clever tactics to disguise empty stores.

"Some of the malls last year would pick a store that was closed and offer free gift wrap there. Others would make them look like extensions of existing stores," said Beemer.

There is a bullish case to make for lower rents. Struggling retailers' hardships are creating opportunities for others — often on the mall operator's dime.

They include pop-up, seasonal stores that last only a few months — such as Halloween stores in former Blockbuster and Circuit City locations. In fact, Beemer said two-thirds of the Circuit City locations have not been leased yet. Plus, he said the growth of dollar stores is a direct correlation to occupancy rates.

"I hate to call them this, but these stores are moochers. They are able to go in and get a rate of 40 cents on the dollar sometimes," said Beemer.

The cheaper occupancy rates are creating opportunities for newer retailers — and they're coming in all different sizes.

Women's clothing retailer Francesca's is now in 41 states — after opening its first store in 1999. The retailer is still growing its chain.

Another example is Cotton On, an apparel retailer, which made its debut in Australia in 1991. Cotton On has been aggressively growing its presence in the United States.

And, Japanese casual clothing retailer UNIQLO is making its way to the U.S. shoreline. It has been opening new stores in New York City this month. It has stores in eleven other countries.

The expansion could be planting seeds of a new bull market in retail. If not, it could end up being red meat for fashion road kill in the ongoing struggling economy.