Image: Dark storefronts
Orlin Wagner  /  AP
Retail vacancies nationwide hover around 10 percent, according to ReStore, the retail division of commercial real estate services firm NAI Global, and could reach 12 percent or more by end of the year.
updated 7/3/2008 2:40:44 PM ET 2008-07-03T18:40:44

Community college classes in the old mall movie theater. A DMV office across from the Starbucks. Maybe a local library between the Victoria's Secret and the Gap.

Mall and strip center owners are turning to untried and untraditional tenants to brighten dark storefronts as the sluggish economy sends more retailers to bankruptcy or forces others to scale back their expansion plans.

Retail vacancies nationwide hover around 10 percent, according to ReStore, the retail division of commercial real estate services firm NAI Global, and could reach 12 percent or more by end of the year. Similarly, Property & Portfolio Research expects vacancies to rise and the total amount of new space leased to drop 94 percent from 2007.

Some of the hardest-hit areas will be the same ones battling the worst declines in housing prices: Southern California, Florida, Las Vegas and Phoenix. Retailers followed the new rooftops there, but are now finding fewer people are living in those houses than expected.

"A lot of the stores that opened in growing communities are definitely feeling the pain today," said David Solomon, president of NAI ReStore. "These guys were paying top-of-the-market rents based on projections that the sky wouldn't fall. They're seeing the hangover effects of that now."

But retail owners and their leasing teams aren't hanging up their hats just yet.

"What we do in these times, we look for nontraditional uses to fill spaces and to generate income and, more importantly, traffic to help existing retailers to produce more sales," said John Bemis, head of Jones Lang LaSalle Inc.'s retail leasing team.

Bemis said it's typical to turn to the public sector, such as colleges or city and state services, as tenants. The Department of Motor Vehicles is a great tenant for a mall or strip center, Bemis said, because people are constantly coming in and out of the government office.

In November, mall owner Pennsylvania Real Estate Investment Trust snagged New River Community College as a tenant for a former theater space in its New River Valley Mall in Christianburg, Va. The satellite location features seven classrooms, four computer labs, a science lab, two auditoriums, testing and conference rooms and office space.

Developers Diversified Realty Corp. is considering leasing to a local library for a year as the library renovates its own location. The real estate investment trust, which owns over 700 U.S. retail centers, also has received interest from politicians who want to set up temporary campaign offices until the election.

"Whether we're dealing with companies that need space for a short time or entrepreneurs who are using the opportunity to go into a shopping center without fully committing to a full lease, we see that as potential clients," said Marc Feldman, Developers Diversified's vice president of new business development.

For stubbornly vacant spaces, some mall owners are transforming the storefronts into billboards, selling ad space until a tenant is found. Developers Diversified recently signed a contract with Boston-based WindowGain Inc., which turns store windows into digital ads.

"We obviously prefer to have permanent tenants in the spaces, but revenue from advertising in some cases could meet what a tenant would pay," Feldman said. "But it's not usually the case."

Solomon, of NAI ReStore, expects retailer struggles to spread as consumers keep watch of their spending as gas soars above $4 a gallon, the dollar keeps falling, job losses mount, the stock market drops into bear territory and housing values plummet.

A number of national chains — including AnnTaylor Stores Corp., Talbots Inc. and Pacific Sunwear Of California Inc. — have already closed hundreds of stores this year. Others, like gadget maker Shaper Image Corp., have filed for bankruptcy protection.

Strip center owners now are considering fitness centers, churches and local retailers for spaces left empty by the Linens 'n Things, whose parent company Linens Holding Co. filed for bankruptcy protection in May — a move they wouldn't have considered in healthier economic times, said Mark Baziak, a senior vice president at real estate service firm Grubb & Ellis Co.

"Landlords are OK'ing guys they didn't look at before, like an alternative retailer with four or five store locations. Maybe their credit isn't great," Baziak said. "They realize otherwise they may not be able to fill those vacancies for years."

To mitigate the risk of unknown retailers or new brand images, mall and strip center owners are offering short-term leases at first, from six months to one year, at desirable rents until they see if the store takes off.

For big-name brands trying to roll out new concepts, like Abercrombie & Fitch's Gilly & Hicks stores or Victoria's Secret's Pink stores, those leases are a way to find the right location without a big commitment, said Richard Hodos, an executive vice president at CB Richard Ellis Inc.

"Doing these pop-up stores is one way to test to see if the concept has legs," Hodos said.

And for new store owners, short-term leases during difficult times may be the only way to get into a great mall location instead of a kiosk or an out-of-the-way, standalone building.

At the Bel Air Mall in Mobile, Ala., first-time business owners and sisters Amber and Mandy Forbes have six months to prove their store's mettle before their short-term lease expires. Polish, a woman's boutique, lights up a space left vacant by G&G, part of BCBG Max Azria.

If the store generates solid foot traffic, a long-term lease could be in the offing. The sisters are optimistic; so far, sales since Polish's opening on May 31 have exceeded their projections.

"The reason we went for the temporary lease is because this is the place you go and shop in Mobile. And it was a good deal," 24-year-old Mandy Forbes said. "We knew we should go for it and see how it goes."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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