U.S. strip malls suffer as retail tenants disappear

By Chelsea Emery

NEW YORK (Reuters) - Along a congested highway in New Jersey lies a small strip mall whose challenges illuminate those of malls throughout the the United States as their tenants are brought low by the economic slump.

In the past several weeks, the eight-store Paramus Towne Square mall in Paramus has seen the parent companies of two of its anchor stores, home goods seller Linens 'n Things and electronics center Circuit City, file for bankruptcy.

And, earlier this year, the mall had to find new tenants for a Borders bookstore, which closed when its parent company cut costs.

"If you are an owner of a mall or a small strip center, it's been a very difficult year and likely to get worse next year," said Mark Claster, a partner at the turnaround and financial advisor, Carl Marks Advisory Group LLC.

Even more so than mega-malls, strip malls -- with a dozen or so stores stretched along busy U.S. highways -- define the American retail landscape, and their owners are suffering.

"Landlords are taking a beating," said Bob Carbonell, chief credit officer for retail credit rating service Bernard Sands.

VACANCIES

U.S. retail vacancy rates rose to 6.6 percent in the third quarter from 6.1 percent a year earlier, according to CoStar Group, a provider of commercial real estate information and data.

Shopping centers, a category that includes strip malls, are doing much worse than that, reporting vacancy rates of 9.4 percent. Larger, enclosed malls are doing better, with vacancy rates of about 3.9 percent.

The store closings have come as the U.S. economic downturn forces retailers to scale back expansion plans, close outposts or file for bankruptcy protection. The trend is expected to accelerate as the financial crisis has tightened credit, say retail analysts and restructuring experts.

The cuts can be devastating to mall owners, who see empty space hurting rental income. It is also troubling to established tenants, who suffer when foot traffic declines.

At the Paramus mall, the Circuit City store is still operating as the parent company reorganizes, while the Linens 'n Things store is liquidating.

For now, the Linens 'n Things sale attracts herds of bargain-hungry shoppers, but other stores worry about what will happen when the space falls empty.

"It's certainly not good for us," said Ron Eisenberg, owner of Chef Central a cooking equipment retailer. "We consider ourselves a destination store, but I would love it if we had great tenants and the mall was packed."

After Linens 'n Things vacates, its 60,000 square foot space could be empty until as late as the last quarter of 2009, the mall's leasing agent said.