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.
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