Chain Store Closures: 3,681 and Counting

As the summer winds down, store closures are piling up. Through mid-July of this year, chain store closures tallied 3,681 compared with 4,603 for all of 2007. The onslaught of shutterings includes such high-profile retailers as Starbucks, Linens 'n Things, Goody's Family Clothing and Ann Taylor. Tepid consumer spending is fueling predictions that more closings will follow.

“It's a very tentative time for landlords,” says Bernard Haddigan, managing director of Marcus & Millichap's national retail group. “I think if you are in urban infill, you are going to be fine because you have a density of population. But some of the pioneers that were building in the path of anticipated residential growth are the ones that are going to get into problems.”

As many as 7,100 store closings are likely this year, projects Marcus & Millichap. Early this year, the firm's forecast was 6,500. Haddigan says he wouldn't be surprised if the actual number of closings for 2008 ends up even higher than the firm's current estimate.

Apparel stores accounted for 35% of store closings tracked by the International Council of Shopping Centers in the first half of 2008. Retailers focusing on home furniture and furnishings made up 6.5% of the closings, an improvement given that the niche made up more than 21.5% of closings in the first half, and about 37% in the second half of last year.

One beneficiary of the rising number of store closings is Excess Space Retail Services, a New York company that assists tenants with space dispositions in addition to lease restructuring. “It will be very robust for us this year and for some time into the future,” says Michael Weiner, president and CEO of Excess Space. The company expects to restructure 3,000 or more store leases this year, a 50% rise from 2007.

Landlords are getting creative at dealing with lease terminations and restructurings so they can keep properties occupied. “Right now, many are just happy to see the spaces get filled as long as the tenant isn't hurting any of the other tenants they have,” says Weiner. Excess Space is picking up business in states hit hard by the housing downturn, such as Florida, California, Nevada, and Arizona.

Properties that include a fair amount of small-shop space, such as strip shopping centers, are feeling some pain, observes Haddigan. “Retailer expansion on the non-credit (unrated), small-shop space has come to a crawl.”

Not all store closures will result in the space coming back to the landlords. Some tenants will continue to pay rent for the duration of the lease, or sublease the space. In the case of bankruptcies that result in liquidation, however, landlords will certainly have extra space on their hands.

A negative chain reaction also is possible in the current climate. In some newer shopping centers, there are co-tenancy agreements and other triggers whereby if one tenant goes dark, others could have the right to depart as well.

“As a landlord you typically don't like to see vacancies,” says Haddigan, “because fewer traffic trips to your property make the rest of the tenants a little more vulnerable to lesser store sales.”

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