By Chelsea Emery
NEW YORK, Nov 26 (Reuters) - Along a congested highway in New Jersey lies a
small strip mall whose challenges illuminate those of malls throughout the the
United States as their tenants are brought low by the economic slump.
In the past several weeks, the eight-store Paramus Towne Square mall in
Paramus has seen the parent companies of two of its anchor stores, home goods
seller Linens 'n Things and electronics center Circuit City, file for
bankruptcy.
And, earlier this year, the mall had to find new tenants for a Borders
bookstore, which closed when its parent company cut costs.
"If you are an owner of a mall or a small strip center, it's been a very
difficult year and likely to get worse next year," said Mark Claster, a partner
at the turnaround and financial advisor, Carl Marks Advisory Group LLC.
Even more so than mega-malls, strip malls -- with a dozen or so stores
stretched along busy U.S. highways -- define the American retail landscape, and
their owners are suffering.
"Landlords are taking a beating," said Bob Carbonell, chief credit
officer for retail credit rating service Bernard Sands.
VACANCIES
U.S. retail vacancy rates rose to 6.6 percent in the third quarter from
6.1 percent a year earlier, according to CoStar Group, a provider of commercial
real estate information and data.
Shopping centers, a category that includes strip malls, are doing much
worse than that, reporting vacancy rates of 9.4 percent. Larger, enclosed malls
are doing better, with vacancy rates of about 3.9 percent.
The store closings have come as the U.S. economic downturn forces
retailers to scale back expansion plans, close outposts or file for bankruptcy
protection. The trend is expected to accelerate as the financial crisis has
tightened credit, say retail analysts and restructuring experts.
The cuts can be devastating to mall owners, who see empty space hurting
rental income. It is also troubling to established tenants, who suffer when foot
traffic declines.
At the Paramus mall, the Circuit City store is still operating as the
parent company reorganizes, while the Linens 'n Things store is liquidating.
For now, the Linens 'n Things sale attracts herds of bargain-hungry
shoppers, but other stores worry about what will happen when the space falls
empty.
"It's certainly not good for us," said Ron Eisenberg, owner of Chef
Central a cooking equipment retailer. "We consider ourselves a destination
store, but I would love it if we had great tenants and the mall was packed."
After Linens 'n Things vacates, its 60,000 square foot space could be
empty until as late as the last quarter of 2009, the mall's leasing agent said.
And, while the Circuit City store is still operating, there is a risk the
chain could shut more stores, on top of the 155 that are scheduled to close.
"When you have (big anchor stores) go out in the same center, that does
not portend well for the remaining retailers that depend on the larger players
to attract the footprints to the other stores," said Nina Kampler, executive
vice president for Hilco Real Estate. "It really forebodes very poorly and I
think strip centers are extremely at risk."
To be sure, bankruptcy does not automatically mean a store will close.
But it can put pressure on landlords to renegotiate leases for lower rents. And
some customers refrain from shopping at bankrupt chains for fear that the stores
could disappear and not honor returns, warranties or gift cards.
PARAMUS NOT ALONE
Homes within one mile of the Paramus Towne Square have an average annual
household income of $96,000, according to Welco Realty Inc, the mall's leasing
agent. But even among such affluence, no shopping center is immune when its
stores struggle.
California malls are racing to find tenants to fill spaces that will be
left by Mervyns department stores space, which are liquidating. Other mall
stalwarts including Ann Taylor and GAP Inc have shuttered stores this year.
Some 148,000 retail stores are expected to close this year, according to
the International Council of Shopping Centers. That's the largest number since
2001 and represents at least 625,000 retail jobs.
"Rents are going to have to come down to fill in these spaces," said
Claster, who said landlords enjoyed a boom time with high rents and are going to
have to make concessions in order to attract tenants.
"The real problem is we haven't seen bottom yet. It's the general feeling
in the market that post-Christmas there are going to be a number of retail
bankruptcies, the result of which, among other things, will be more dark
stores."
Malls could also see their tenant mix changing dramatically.
Paramus Towne Square's leasing agent, Welco Realty Inc., said it is in
negotiations over the Linens 'n Things space, from possible tenants as diverse
as grocery operators.
"We would be creative on the rent and start them lower at the beginning
and make it up at the end of the lease," said Jerry Welkis, Welco president and
principal.
Store leases have gone from being an in-demand asset to almost unwanted
because of the state of the U.S. economy, said Hilco's Kampler said. "All three
are blanks right now."
"Landlords don't need any more vacant space back right now," she said.
"There are huge growing vacancies everywhere, and there are far fewer retailers
taking space."
(Reporting by Chelsea Emery; Editing by Eddie Evans) Keywords: STRIPMALLS/
(chelsea.emery@thomsonreuters.com; +1 646 223 6115; Reuters Messaging:
chelsea.emery.reuters.com@reuters.net)
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