Circuit City collapse could hit real estate investors

By Ilaina Jonas

NEW YORK (Reuters) - The collapse of electronics retailer Circuit City (CCTYQ.PK) could drive down shopping and strip mall rents, and deal another blow to commercial mortgage-backed securities' (CMBS) investors who have already seen their bond prices slide.

After a dismal holiday shopping season and several failed attempts to sell itself, Circuit City -- having filed for Chapter 11 bankruptcy protection in November -- last week said it would close all its 567 U.S. stores and liquidate its assets.

The move left 30,000 employees of the Woodland Hills, California-based company without work, and creditors -- including landlords -- lining up to get whatever they can after the company sells its inventory.

"Now those landlords are in line like the rest of their creditors -- and probably in the back of the line to get paid," said Suzanne Mulvee, Property & Portfolio Research real estate strategist.

The loss of the large tenant, whose stores typically run from 35,000 to 40,000 square feet, is likely to be felt by some publicly traded shopping center owners, such as Developers Diversified Realty Corp (DDR.N), where Circuit City accounted for 1.7 percent of its annual base rent revenue, and Kimco Realty Corp (KIM.N), where the chain accounted for 1.5 percent of its annual base revenue, according to Green Street Advisors analyst Nick Vetter.

Other landlords include Inland Western Real Estate Retail Trust, Simon Property Group Inc (SPG.N), Vornado Realty Trust (VNO.N), Weingarten Realty Investors (WRI.N), First Capital Realty Inc (FCR.TO), Kite Realty Group Trust (KRG.N) and Arcadia Resources Inc (KAD.A), according to financial data firm SNL Financial.

Yet the pain will be felt throughout the retail real estate market, several real estate experts said.

"A company like Circuit City is the poster child for what's going on," Mulvee said. "There's a bigger disease at work here."

DREARY DAYS

Retailers are seeing their revenue drop as financially strapped U.S. consumers retrench and spend less.

The holiday shopping season, which often accounts for 30 to 40 percent of a retailer's annual revenue, failed to save companies this year as U.S. sales fell 2.8 percent, the first decline since 1995.

Retailers are now forced to renegotiate their leases to cut costs. And with landlords facing more empty space and lower demand, they will likely play ball.

"What this does to the rest of the retail market is you've got an increase in vacancy rates, and you've got more vacant space, chasing fewer retailers that need that space," said Steve Jellinek, vice president of credit rating agency Realpoint LLC. "Ultimately, we've already begun to see it, rents are going to fall."

Rents at strip malls have fallen at an increasing rate over the past three quarters with the greatest drop, 0.9 percent, in the fourth quarter of 2008, according to real estate research company Reis Inc.

About half the shopping centers where Circuit City is a major tenant have mortgages that have been pooled and manufactured into CMBS, with more than $4 billion left on the balance of the mortgages, according to Realpoint.