Eileen Mitchell, RCS Real Estate AdvisorsResearch some rent and sales data on the high streets and class "A" or "A+" regional malls around the country, and you might conclude a robust recovery is in full swing. Manhattan storefronts in and around Times Square are asking for rents of $2,000 per square foot. SoHo and Union Square in New York, and Michigan Avenue in Chicago, are commanding rents of more than $500 per square foot.
Eye-popping rates are once again the norm in many of the biggest MSAs across the country. Meanwhile, with demand in these markets at a high, many top-tier malls are commanding sky-high base rents and CAM charges, making it tough for chains to afford any space.
Drive out of the city to tertiary markets like Altoona, Penn., however, and the economic picture looks very different. As of June, Altoona's unemployment rate stood at 7.5 percent, up from a low of 3.7 percent in Sept. 2007. The city's population of about 46,000 people has been on the decline for some time now, and vacancies are more common at malls and other retail properties around town.
This "tale of two markets" highlights the unmistakable divide running through today's retail markets: Even as the "rich get richer" in the best MSAs, assets in blue-collar markets continue to take a beating. But, the real culprit here is simple: far too many secondary and tertiary markets have been "over-malled."
Back when the economy was good, these markets became overbuilt with retail. Today, it's not unusual to have five malls in an area where the level of disposable income is only capable of supporting just one or two. Gone are the days when developers and retailers could hang their hopes on future residential growth. Today's retailers are focused on avoiding cannibalization and on taking advantage of existing demos.
Chains like Gap and Ann Taylor are pulling out of the secondary markets like Altoona even as they sharpen their focus on the Michigan Avenues of the world. This is putting developers in a quandary. So far the "solutions" to this problem—signing local names on a temporary basis or telling retailers they have to take space in a secondary market if they want a spot in an "A" property—are unsatisfactory. Over the last 12 or 18 months, more landlords have been focused on the latter option, in particular, but pushback is strong. Retailers are not willing to waste precious resources at the mall on the outskirts when it has no real prospects for growth.
Even though opening on a high street costs about 40 percent more than in a center, retailers prefer it over signing leases that, in their view, will go nowhere. These chains would rather pay premium rent to be a couple of blocks away from a busy Apple store that's next to a university campus downtown.
So what's a suburban landlord to do? GGP spun off many of its underperforming properties to Rouse, which is now experimenting with hybrid redevelopments: You keep one or two anchor tenants along with some portion of the inline specialty leasing, and the rest of the property becomes a healthcare center, municipal office or some other non-retail use.
And, while this may not be a landlord's first choice, it may be the best choice under the current circumstances.
— Eileen F. Mitchell is executive vice president and head of the growth and development and outsourced real estate management practice of New York-based retail real estate advisory firm RCS Real Estate Advisors. She can be reached via e-mail at