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Store Closings Likely to Peak in First Half of 2010

Among the few bright notes for retail real estate professionals in this year of bad news has been the fact that, contrary to expectations, store closings never reached Armageddon-like levels many were predicting. In fact, in the first half of 2009, there were fewer store closings than during the same period in both 2008 and 2007.

Year-to-date, the U.S. retail industry saw 3,840 store closings, according to ICSC. That would put 2009 on pace with 2006, when a total of 4,730 stores closed. (Retail Traffic has attempted to keep a tally of closings as well. So far, we've counted 4,283 announced closings.) The number of closings is far short of the 10,000 to 12,000 closings experts projected last year.

Some experts are seeing the fewer-than-expected closings as a sign that the worst is over for the industry, especially given the broader economic stabilization that has emerged in recent months. But a number of retail consultants and space disposition experts contend that many underperforming stores were kept in business this year thanks to rent relief measures granted by their landlords, as well as a great deal of corporate cost-cutting.

There are still reasons for concern. U.S. GDP declined by an annualized rate of 0.7 percent in the second quarter. In September, the national unemployment rate reached 9.8 percent and same-store sales rose 0.1 percent from last year, according to ICSC, even with the boost from late back-to-school shopping and despite having a favorable comparison to last year's weak September when retail sales tanked.

In addition, there are lackluster projections for the 2009 holiday shopping season, a period of paramount importance to retailers' annual sales. This holiday season will likely be the second worst in 42 years, with flat growth in same-store sales, according to a forecast from Retail Forward Inc., a Columbus, Ohio-based consulting firm. Global consulting firm Deloitte expects similar results, with $810 billion in sales during the November-January period. If those projections come to pass, Excess Space Retail Services Inc., a Huntington Beach, Calif.-based real estate disposition and lease restructuring firm, expects to see anywhere from 6,000 to 8,000 store closings in the first two quarters of 2010.

If many underperforming stores managed to stay open this year, it was due in large part to tenants' successful efforts to secure rent reductions for those locations rather than to a better than expected business climate, says Alvin Williams, principal with Excess Space.

"At the end of 2008, we thought that 2009 would be a record-setting year as it relates to store closures, but something very different occurred—retailers were able to [use poor market conditions] to open up a dialogue with landlords to restructure leases to make it more feasible to operate under-performing locations," Williams says. "Retailers have really done all they can to keep their lights on in 2009, and we think in 2010, retailers that were unable to restructure their leases or continue to struggle in spite of restructuring" will close stores, he adds.

Andy Graiser, co-president of DJM Realty, LLC, a Melville, N.Y.-based real estate consulting firm, is more optimistic—he estimates the number of store closings next year might be equivalent to what we've seen in 2009. That's both because he doesn't think there will be as many big national tenants filing for bankruptcy as there were in 2008 and because retailers have done all they can to stay financially solvent by cutting costs. Still, "you can just go so far with that," Graiser says. "You've still got to sell merchandise."

For his part, Howard Davidowitz, chairman of Davidowitz & Associates, Inc., a New York City-based retail consulting and investment banking firm, expects a fair number of store closings to come as a result of bankruptcies and liquidations. He notes that smaller, independent retailers are still having trouble securing financing from the banks and lack of credit has been a major reason behind some recent liquidations, including that of house wares seller Linens 'n Things.

In addition, even sectors that are supposed to be "recession proof," including supermarkets, discounters and warehouse clubs, have seen some players struggle to stay afloat during this cycle. This spring, for example, Birmingham, Ala.-based supermarket chain Bruno's had to file for Chapter 11 protection and ended up closing at least 10 under-performing stores.

"At the core of this issue is the consumer," says Davidowitz. "And if you've got weak job growth, constrained credit and all this over-supply [of stores], where are you? The consumer is going to be conservative and save. There's going to have to be an adjustment made on the number of stores, and there's definitely going to be more of it in 2010."

--Elaine Misonzhnik

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