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U.S. Retail Store Closures Flirting with Six-Year High

Bankrupt home furnishings retailer Linens 'n Things' disclosure this week that it plans to dispose of 120 locations is the latest burst in the retail sector's growing flood of store closings this year that has the industry's real estate disposition firms scrambling.

On Monday, Linens Holding Corp. announced it had hired DJM Realty, LLC, a New York-based real estate consulting firm, to dispose of its under-performing stores located in 31 states. Also, the Clifton, N.J.-based chain telegraphed it was preparing to shutter as many as 80 more of its 589 stores in the near future, says Andy Graiser, co-CEO of DJM Realty.

The disclosure comes as the sector struggles with retailers' jettisoned expansion plans amid a seemingly unending string of store closing announcements. Home Depot recently said it would shut 15 existing stores this year and reduce the number of new store openings by almost half to 55. Then the Hilco Organization and Gordon Brothers Group, new owners of Sharper Image, announced that they will close all 86 of the chain’s remaining stores. And, Gap Inc. plans to close an unspecified number of stores while downsizing many of its remaining locations.

“You are going to see a lot more closings; we are not even close to the end,” says Graiser. “There are a few thousand more stores” coming on the market.

In addition to the Linens ‘n Things contract, DJM just got the assignment to dispose of 69 leases on behalf of Goody’s Family Clothings, Inc., a Knoxville, Tenn.-based chain that sells affordable family apparel.

In its April 16 report “Retail Real Estate Business Conditions” ICSC revised the number of expected store closings for this year to 6,500 from 5,770. Overall, that accounts for about 1 percent of all existing stores, according to ICSC. That figure would also be the highest number of closings since 2001, when retailers shut the doors at 7,041 stores.

“There has been a decent amount of store closings recently, but not a crazy number like at the beginning of the year," says ICSC research analyst John Connelly. "Unfortunately, the thing about closings is that sometimes they come in spurts. You get bombarded with a few within a short period of time.”

Excess Space Retail Services projects that the number of store dispositions it will handle this year could rise 30 percent above last year’s levels. Previously, the Huntington Beach, Calif.-based real estate disposition and lease restructuring firm had projected a 20 percent increase in its disposition portfolio for 2008. DJM also raised its disposition estimates for this year to a 50 percent increase over 2007 from 20 percent.

As the leasing environment is becoming even more challenging for landlords, Excess Space principal, Alvin Williams, points out that some retail sectors are still growing, including grocery chains and drug stores, which are benefiting from consumers’ unwavering need for food, prescriptions and other necessities. Discounters and big box operators are also seeing an uptick in business.

On the flip side, the slowdown is hitting apparel retailers hard. With 803 stores shutting down, apparel chains accounted for 38 percent of the total 2,122 closures during the first quarter. The home entertainment sector, with 649 closings, or 30.6 percent of the total, was next on the list. Non-classified retail (chains including Rent-A-Center, which specializes in rent-to-own furniture, electronics and appliances), ranked third with 293 closings, followed by jewelers, with 105. The rankings represent a change from 2007, when the home furnishings sector accounted for 26.7 percent of all closures, 1,228 in all for the sector. This year home furnishings have only accounted for 60 closings.

“Anything that relies on non-core or luxury items as its primary focus of sales” is in trouble, says Williams, who adds restaurant chains have started to close more locations as people have relegated themselves to eating at home in the wake of the skyrocketing food and gas prices.

The upside to disposing of a struggling retailer's shuttered locations is that healthy chains are sitting on the sidelines waiting for an opportunity to secure coveted spots. Graiser says he has already received inquiries regarding some Linens ‘n Things locations in markets with high barriers to entry. Linens ‘n Things stores average between 30,000 and 40,000 square feet.

Williams adds the number of store closings is so high this year because in contrast to past economic downturns retailers are more proactive about managing their real estate

“We are in an environment where retailers really take a good look at that bottom 5 percent to 10 percent of their stores and that includes not just managing your disposition, but also taking a hard look at your lease terms when you sign lease renewals,” says Williams. “For a healthy retailer, that’s a healthy thing to do.”

--Elaine Misonzhnik

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