The prolonged economic slowdown is creating brutal conditions for owners of malls and shopping centers. Recent projections from market research firms signal vacancies will be near record highs for 2009 and 2010. Meanwhile, landlords faced with bulging rosters of troubled retailers have been forced to lower rents and offer concessions to keep their centers from resembling ghost towns.

Last month, New York City-based Reis Inc. reported 2008 fourth quarter vacancy rate at U.S. neighborhood and community shopping centers hit 8.9 percent, 50 basis points above the rate recorded in the previous quarter. It is the largest quarterly increase since the company began tracking data a decade ago. The vacancy rate at malls and lifestyle centers also rose by 50 basis points, to 7.1 percent.

In addition, effective rental rates fell 1.1 percent last year and will likely continue their downward spiral for the next two years, projects Reis.

Reis researchers expect that the vacancy rate for neighborhood and community centers will reach 10.6 percent and effective rents will decline 3.0 percent to $16.88 per square foot by the end of the year. Reis estimates the vacancy rate will climb to a new high of 11.6 percent in 2010 with effective rents dropping another 1.4 percent to $16.65 per square foot. Reis adjusted that projection downward from a report it issued last October. At that time, the company had projected a 2009 vacancy rate of 9.9 percent. Reis’ forecast is culled from data on neighborhood and community shopping centers and power centers of more than 5,000 square feet.

“This is already fairly bleak, but as things [deteriorate], I can’t guarantee that we won’t see [even] worst projections,” says Victor Calanog, director of research at Reis.

Property & Portfolio Research (PPR), a Boston-based real estate research firm, which tracks all retail properties across 54 markets in the United States larger than 30,000 square feet, projects the retail vacancy rate will fall short of the record high of 18.9 percent reported in 1992, according to Michael Cohen, a research strategist with the firm. Meanwhile, Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm, projects that the retail vacancy rate this year will rise 170 basis points, to 10.2 percent, from 8.5 percent in 2008. Marcus & Millichap tracks all retail centers greater than 10,000 square feet throughout the nation.

The current situation, brought on by a confluence of several factors putting adverse pressure on consumer spending, is affecting the health of retail tenants. In addition to the ongoing U.S. housing slump and global credit crisis, both of which have forced consumers to curtail their shopping, the American job market is at its worst since the mid-1970s. In January, the U.S. Bureau of Labor Statistics reported a loss of 598,000 jobs, the biggest decline since December 1974. Americans, worried about everything from their job security to the health of their pension plans, have been spending less on everything save the basic necessities. As a result, the U.S. saw approximately 6,530 store closing announcements in 2008, according to Marcus & Millichap, and ICSC is projecting another 3,100 announcements to come in the first half of 2009. To date, announcements from retailers about bankruptcies, liquidations and closures affect up to 1,764 stores.

But falling demand is only part of the story, says Hessam Nadji, economist and managing director of research with Marcus & Millichap. The retail sector has had a lot of new product come on line in recent years and it will continue to deliver more space in 2009.

“It’s not just a matter of a demand contraction,” Nadji says. “We did have a bit of a supply bubble as well.”

Last year, Marcus & Millichap estimates, retail completions reached 130 million square feet and will total approximately 90 million square feet this year. PPR’s estimates are more modest. It expects 78 million square feet of new retail space to come on line this year and another 24 million square feet in 2010. What’s certain is that extra supply will put continued strain on occupancies. In 2008, according to Reis, completed projects had an average vacancy rate of 50 percent, compared to no more than 30 percent during the boom years.

Faced with one of the worst years on record, landlords have been lowering rents, granting free rent periods and offering tenant improvement dollars to prevent retailers from moving out, says David Solomon, president of NAI ReStore, a Narbeth, Pa.-based retail real estate services firm. Taking those measures into account, in recent months, he says, effective rental rates have dropped between 15 percent and 20 percent, depending on the market. During a recent conversation about market conditions, the president of a large retail REIT told Solomon, “Rent? What’s rent? We are glad to get a warm body with a pulse.”

“He was half joking,” says Solomon. “But there is an element of truth to it.”

--Elaine Misonzhnik