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FEATURES Chart 1-1


Shares of U.S. Shopping Centers by Vacancy Rate of Centers


Sources: CoStar, PPR, Deutsche Asset & Wealth Management; data as of Q4 2012


Unfortunately, this imbalance is not expected to correct soon as downsizing store counts and sizes by national tenants will persist. Meanwhile, 11% of centers are failing, with vacancies


between 20% and 40%; their share of vacant space (28%) is three times their share of total shopping area (9%). The final 8% of centers is clearly redundant, as evidenced by enduring vacancies of 40% or more.2 With barely 5% of the country’s shopping-center space, these centers account for more than one-third of the vacant space nationwide. For all intents and purposes, these assets have failed; they are often functionally obsolete, and cannot compete for other tenants or shoppers. No one wants to shop at a half-vacant center, and no retailer wants to invest its resources or reputation in such a failure, no matter what the rent. Only a massive repositioning could bring them back into the competitive inventory. While not impossible, truly successful turnarounds are rare. More likely, the space should be razed in favor of alternative uses. But owners are usually


slow to act, deterred by lack of capital, resistance from tax-hungry city governments, lease obligations, or just inertia. The unwillingness or inability to act delays the inevitable—often for years or even decades—and inflates measured vacancy rates for the sector. The market is unforgiving to weaker tenants or


shopping centers in the retail sector—constant shifts in consumer preferences and technologies cause a relentless birth/death cycle for both tenants and centers. But this process has been aggravated by the recession, over- expansion by retailers during the housing boom, and technological innovation in the way consumers shop. These three forces have accelerated the number of centers entering the failing/failed category. In fact, in 2006, less than 4% of all centers had vacancies of more than 40%; today, it is almost 8%. Similarly, in 2006, only 6% of centers were failing (vacancies between 20% and 40%) compared to 11% today. What is so striking about the weak end of the


spectrum is the disproportionate share of vacancy held there; fully one-third of all vacant space exists in the “failed” cohort. (See Chart 1-2). Excluding this space from


2 Note that these figures include only operating centers and exclude centers under construction or renovation. INTERNATIONAL COUNCIL OF SHOPPING CENTERS 2 RETAIL PROPERTY INSIGHTS VOL. 20, NO. 2, 2013


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