U.S. strip malls suffer as retail tenants disappear

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.

And, while the Circuit City store is still operating, there is a risk the chain could shut more stores, on top of the 155 that are scheduled to close.

“When you have (big anchor stores) go out in the same center, that does not portend well for the remaining retailers that depend on the larger players to attract the footprints to the other stores,” said Nina Kampler, executive vice president for Hilco Real Estate. “It really forebodes very poorly and I think strip centers are extremely at risk.”

To be sure, bankruptcy does not automatically mean a store will close. But it can put pressure on landlords to renegotiate leases for lower rents. And some customers refrain from shopping at bankrupt chains for fear that the stores could disappear and not honor returns, warranties or gift cards.

PARAMUS NOT ALONE

Homes within one mile of the Paramus Towne Square have an average annual household income of $96,000, according to Welco Realty Inc, the mall’s leasing agent. But even among such affluence, no shopping center is immune when its stores struggle.

California malls are racing to find tenants to fill spaces that will be left by Mervyns department stores space, which are liquidating. Other mall stalwarts including Ann Taylor and GAP Inc have shuttered stores this year.

Some 148,000 retail stores are expected to close this year, according to the International Council of Shopping Centers. That’s the largest number since 2001 and represents at least 625,000 retail jobs.

“Rents are going to have to come down to fill in these spaces,” said Claster, who said landlords enjoyed a boom time with high rents and are going to have to make concessions in order to attract tenants.

“The real problem is we haven’t seen bottom yet. It’s the general feeling in the market that post-Christmas there are going to be a number of retail bankruptcies, the result of which, among other things, will be more dark stores.”

Malls could also see their tenant mix changing dramatically.

Paramus Towne Square’s leasing agent, Welco Realty Inc., said it is in negotiations over the Linens ‘n Things space, from possible tenants as diverse as grocery operators.

“We would be creative on the rent and start them lower at the beginning and make it up at the end of the lease,” said Jerry Welkis, Welco president and principal.

Store leases have gone from being an in-demand asset to almost unwanted because of the state of the U.S. economy, said Hilco’s Kampler said. “All three are blanks right now.”

“Landlords don’t need any more vacant space back right now,” she said. “There are huge growing vacancies everywhere, and there are far fewer retailers taking space.”