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Friday, April 18, 2008 2:47 PM

Shopping Center Economic Model Is History

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Expect to see a major wave of shopping center supply later this year.

The total RSF of U.S. shopping centers delivered annually has been dropping each year since peaking at 94 million square feet in 2005. However, this year a huge wave of new centers that began construction back in better days (economically speaking) is now delivering, with 25 million square feet already delivered in the first quarter of this year. With still more space in the pipeline set to deliver in coming months, there is the very real possibility that just as much or more RSF of new shopping center space will reach completion during 2008.

click on chart for sharper image

What makes this massive addition of new supply somewhat disconcerting are the vacancy statistics of shopping centers delivered over the past three years. CoStar's Year-End National Retail Report showed U.S. shopping centers ended 2007 with an average vacancy rate of 7.6 percent. The chart below shows that shopping centers delivered between 2001 and 2004 have a vacancy level below this national average, however, the rate rises with each year -- shopping centers delivered in 2005 have a current average vacancy of 9%; 2006 (13%), 2007 (22%), and 2008 (28%). These statistics suggest that owners of shopping centers built since 2006 still have yet to achieve a desired occupancy level.
Wave Of Bankruptcies

The new space that's coming available will not be needed. A Retailing Chains Wave of Bankruptcies tells the story.
The consumer spending slump and tightening credit markets are unleashing a widening wave of bankruptcies in American retailing, prompting thousands of store closings that are expected to remake suburban malls and downtown shopping districts across the country.

Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.

But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.

Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.

“You have the makings of a wave of significant bankruptcies,” said Al Koch, who helped bring Kmart out of bankruptcy in 2003 as the company’s interim chief financial officer and works at a corporate turnaround firm called AlixPartners.

“For years, no deal was too ugly to finance,” he said. “But now, nobody will throw money at these companies.”

Changes in the federal bankruptcy code in 2005 significantly tightened deadlines for ailing companies to restructure their businesses, offering them less leeway.

And the changes may force companies to pay suppliers before paying wages or honoring obligations to customers, like redeeming gift cards, said Sally Henry, a partner in the bankruptcy law practice at Skadden, Arps, Slate, Meagher & Flom and the author of several books on bankruptcy.

As a result, she said, “it’s no longer reorganization or even liquidation for these companies. In many cases, it’s evaporation.”

Whether more chains file for bankruptcy or not, it will be hard to miss the impact of the industry’s troubles in the nation’s malls.

J. C. Penney, Lowe’s and Office Depot are scaling back or delaying expansion. Office Depot had planned to open 150 stores this year; now it will open 75.

The International Council of Shopping Centers, a trade group, estimates there will be 5,770 store closings in 2008, up 25 percent from 2007, when there were 4,603.

Charming Shoppes, which owns the women’s clothing retailers Lane Bryant and Fashion Bug, is closing at least 150 stores. Wilsons the Leather Experts will close 158. And Pacific Sunwear is shutting a 153-store chain called Demo.

Those decisions were made months ago, when it was unclear how long the downturn in consumer spending might last. If March was any indication, it is nowhere near over. Sales at stores open at least a year fell 0.5 percent, the worst performance in 13 years, according to the shopping council.
List Of Store Closings Grows
  • Linens ‘n Things - Potentially 500
  • Foot Locker - 140
  • Lane Byrant - 150
  • Wilsons the Leather Experts - 158
  • Pacific Sunwear - 153
Shopping Center Economic Model

In Does The Shopping Center Economic Model Work? I listed 26 retailers cutting back large numbers of stores. The 5 stores above need to be added to the list.

With that, let's review some comments about attitude changes driving those closures.
Nina Kampler, Executive VP of Strategic Retail and Corporate Solutions for Hilco Real Estate: There's a wave of conservatism that's hitting the consumer. There are very few people who 'need' another t-shirt or pair of jeans right now. "Putting aside whatever operational issues they may be addressing -- We're in an economy where people might begin to think twice about spending $5 on a cup of coffee; so suddenly you don't need two coffee shops on a single city block." .... If closings are happening in significant numbers, landlords may question whether the existing shopping center economic model works.

Rob Plaza, Senior Equity Analyst for retail stocks at Zacks Investment Research: For the next decade, retailers are not going to have to open a brand new store because there's going to be so many empty ones that need to be filled.
JC Penny Scales Back Plans

Amid economic concerns JC Penney moderates 2008 growth plans.
Reacting to the economic slowdown, JC. Penney Co. will open fewer new stores this year than originally planned while stepping up its efforts to attract frugal shoppers away from rivals with new brands and marketing pitches.
My Comment: The only pitch consumers want to see is lower prices.
The Plano, Tex.-based department store chain plans to open 36 new stores this year instead of the 50 it had projected. It also aims to renovate 20 units this year, instead of the planned 65. Executives are reviewing reductions in Penny's store growth plan for 2009 but won't make any decisions until July.

Given the economic uncertainty, "we need to inspire customers to shop more with us and not the competition," said Ken Hicks, president of J.C. Penney. He told investors that the company is "keeping a laser focus on the customers and on their wants and needs."
My Comment: Cutting back renovations from 65 to 20 is not very inspiring. More importantly, look at how many potential jobs went poof with these cutbacks.
Penney this week announced several new lines for teens, along with the launch of a new store brand of home furnishings and accessories called Linden Street. It also said that it is expanding its store label lingerie brand called Ambrielle to include large sizes and is adding a collection of business casual offerings to its Stafford's men's clothing collection.
My Comment: Launching a new line of home furnishings in this environment is a waste of money.
To improve store traffic, Penney is sharpening its price message. Mark Boylson, chief marketing officer, said that shoppers come to Penney for specific occasions like the back-to-school or for the holiday season but the challenge "is to drive traffic during the non-peak sales period.
My Comment: Talk about beating around the bush. The only way to "sharpen the price message" is to cut prices.
Myron "Mike" Ullman, chairman and CEO of Penney told investors on Tuesday, the first day of the two-day conference, that what is most challenging about this economic downturn compared with past slowdowns is that it has been so "unpredictable." Consumers, he said, are faced with much uncertainty in the housing market as well as volatility in the financial markets.
My Comment: Unpredictable? Good God! There was a two year warning with slumping home sales.
"We think it's going to take awhile before it gets predictable," Ullman said.
My Comment: It's predictable now. Sales are headed into the toilet and they are going to stay in the toilet. An "L" Shaped Recession is on the horizon.

Consumer Spending Contraction

Merrill Lynch is offering Thoughts on consumer spending.

Consumer Malaise

  • Retail outlets are being closed at a 25% year-on-year rate.
  • Retail sales have stagnated since September 2007.
  • Ex-gas retail sales are lower today than they were in May 2007
  • A 10-month period of malaise like this was last seen in February 2003 ahead of the 1% funds rate
  • And before that, such a long phase of moribund nominal spending occurred in the 1991, 1982 and 1980 recessions.
  • Private payrolls and market-based consumer spending peaked in November.
  • Consumer confidence has fallen to a 26-year low
  • Real average weekly earnings are deflating year-on-year.
  • Debt payments running more than double the pace of wage growth.
  • Fiscal stimulus may end up adding just 0.5 percentage point to GDP growth from May to August.
Glut Of Mall Space

A Glut Of Mall Space Headed Our Way

Projected retail demand "will justify only 43 percent of the new space delivered this year and last," the Wall Street Journal said, citing market-research firm Property & Portfolio Research Inc.

That projection was made in January. Look at the wave of bankruptcies, store closings, and unplanned cutbacks that have occurred since then. Rising vacancies will pressure lease rates even though overly optimistic lease rates contributed largely to the boom. No one at any stage of the game ever bothered to figure out who was going to occupy all this space.

Wave Of Bank Failures Coming

U.S. News & World Report is asking Bank Failures: Should You Be Worried?
Housing and credit problems are threatening to touch off a troubling new trend: an increase in bank failures. As the banking industry braces for higher loan losses, the Federal Deposit Insurance Corp.—which guarantees accounts at more than 8,500 banks and savings associations—has recently increased its tally of "problem" institutions by more than 50 percent, to 76, from the year-earlier period. Meanwhile, the agency is working to bring 25 officials—who served during a wave of bank failures in the savings and loan crisis of the 1980s—out of retirement.

The FDIC's moves come weeks after another bank regulator, Comptroller of the Currency John Dugan, predicted "an increase in bank failures" in the coming months. Federal Reserve Chairman Ben Bernanke expressed similar concerns in congressional testimony last week but noted that while certain smaller banks—especially those concentrated in real estate lending—could go under, the nation's banking giants face less danger.
Remarks By Dugan

Remarks by John C. Dugan Comptroller of the Currency January 31, 2008

Over a third of the nation’s community banks have commercial real estate concentrations exceeding 300 percent of their capital, and almost 30 percent have construction and development loans exceeding 100 percent of capital. Here in Florida, as in other states where housing is so important to local economic growth, the concentration levels are more pronounced. Over 60 percent of Florida banks have CRE loans exceeding 300 percent of capital, and more than half have C&D loans exceeding 100 percent of capital.
Lease rates are going to sink, vacancies are going to soar, and the oncoming supply of mall space with no tenants is going to bankrupt many regional banks that funded such construction. The shopping center economic model will soon be history.

Mike "Mish" Shedlock
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