According to a report released by Reis Inc, a leading real estate research firm, the US strip mall vacancy rate has surged to 10% in the second quarter of 2009 – the highest in 17 years.
Due to the continued downturn in the housing industry and the implosion of the credit markets, retail fundamentals are rapidly deteriorating across the country. However, Regency Centers Corporation (REG) – a leading real estate investment trust (REIT), has continually performed at the top-end of its peer group.
The company is one of the leading owners, operators, and developers of grocery-anchored retail shopping centers in the US. Regency’s retail strip center portfolio is among the best in the sector, with properties in high income, high-barrier markets. The company has a significant percentage of its portfolio in large population centers in Florida, Texas and California.
During the quarter, asking rent in the strip mall segment has decreased 1.7%, compared to the year-earlier quarter to $19.28 per square foot. Taking into account the rent-free months and improvement costs to landlords, effective rents or net cash received as rent decreased 3.2% year-over-year in the quarter to $17.01 per square foot. Consequently, with decreasing cash flows the risk of loan defaults has increased considerably in the strip mall segment.
Continued job losses have fuelled greater insecurity among consumers, and spending has plummeted. Increased home foreclosures have further led to a marked slowdown in the sector. Consequently, with declining consumer confidence, large and medium sized stores have curtailed expansion plans and have closed underperforming stores.
However, Regency has a diversified portfolio of retail centers in strong long-term markets. The average household income in the company’s markets is $89,000 – nearly 30% higher than the national average. In addition, the company’s dominant anchor tenants are grocery stores, which have beaten the trend in a weakening economy.
About 16% of the company’s base rent comes from its four largest grocery store tenants and about 78% of the portfolio is leased to national and regional retailers.
The company has a strong balance sheet, and has ample liquidity to fund 2009 debt maturities and the in-process pipeline. We believe that Regency is well-capitalized to weather the current retail downturn, and could find some attractive buying opportunities in distressed markets. We continue our Buy rating on Regency.
Read the full analyst report on “REG”
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