Shadow Closures
Many chains aren’t following through on store-closing announcements
Those pesky e-mails with “warning!” in the subject line might be dubious, but they do offer clues about the prevailing zeitgeist. Two years ago many of these 21st-century chain letters warned of an impending tsunami of store closures and urged worrywarts to steer clear of gift cards. The widely forwarded missives were wrong enough on the specifics to merit a page on the Snopes.com debunking site. As concerns the broader outlook for retail in the wake of the economic collapse, however, they were basically correct.
A host of household names, including Bombay, Foot Locker, Linens ’n Things, Sharper Image and Zales, to name just a few, had already moved to shutter hundreds of stores. And the consensus among economic forecasters was that store closures would indeed reach catastrophic levels in 2009.
“You had a huge number of bankruptcies and foreclosures in 2008 when these predictions [for 2009] were being made,” said Sandy Sigal, president and CEO of NewMark Merrill Cos. “It felt like, ‘When will the next shoe drop?’ ”
To the surprise of many, however, this unprecedented wave of store closures never quite happened. By ICSC’s count, the number of planned store closings announced last year totaled 4,763. That is far fewer than the 6,913 planned closings announced in 2008, or, for that matter, the 7,041 announced store closings tallied by ICSC in 2001. “Because our announced store-closures series has been done using the same methodology for nine straight years, it is a good gauge for comparing 2009 against other years,” said ICSC research analyst John Connolly. “The real story here is that things are not necessarily getting worse.”
Media reports often treat the above figures as synonymous with the total number of U.S. stores actually closed in a given year. In fact, this number reflects only announced closings by national chains and includes no data for mom-and-pops. “There is essentially no comprehensive way to track the actual, physical closures,” Connolly said. Still, ICSC researchers do their best to come up with comprehensive estimates. Working with Bureau of Labor Statistics data, they estimate that 148,000 stores closed in 2008. No comparable estimate is available yet for 2009, because the bureau’s numbers lag by nine months.
ICSC’s findings on the announced closures in 2009 are in line with those of other research organizations.
“We actually counted up 2008 and 2009 by hand,” said Suzanne Mulvee, a real estate strategist with Property & Portfolio Research, a CoStar Group affiliate. “And 2008 was the big year. That had a lot to do with what was going on in the broader financial markets at the time. Retailers could be more aggressive about store closures because their stocks — and the whole economy — had already tanked. Some of them said, ‘If we’re going to survive, we have to cut our losses. Why not do it now?’ ”
The dynamics on the street also appeared to jibe with the numbers. “It seemed as though half the amount of closings had occurred [at year-end 2009] that we thought would occur,” said Michael Wiener, president and CEO of Excess Space Retail Services, a consulting and advisory firm focused on real estate disposition and lease restructuring for retailers. Likewise, the fallout of big-box tenants clearly has slowed
in major markets like metro Atlanta, says Monetha Cobb, a partner and retail broker in the Georgia division of The Shopping Center Group, a full-service real estate firm based in Atlanta. “There have been fewer anchor closings,” she said. “We’re no longer seeing the mass exodus of 20,000- or 30,000-square-foot tenants.”
All this might sound like good news. But to paraphrase a former president, it depends on what the definition of “good” is. “No Armageddon,” Mulvee said. “Good news in that regard.” Ultimately, however, 2009 was a very tough year, as anyone working in commercial real estate knows all too well. In the quarterly Retail First Glance report, Reis economist Ryan Severino details a litany of harrowing retail performance trends from the fourth quarter of 2009. Though the pace of store closures did continue to slow, he writes, signs of “massive distress” in retail were unmistakable. These included spiraling vacancies at both malls and shopping centers, and across-the-board declines in rent.
Severino’s report is peppered with unsettling sentences such as “This is the first time there has been such a uniform distribution of distress in Reis’s 29-year history of [tracking] neighborhood and community centers.” Or “This is the first time in almost 10 years of quarterly history that Reis has observed rent declines for five consecutive quarters.”
How, then, did chains manage to announce fewer store closures in 2009 than in previous years? Experts cite several factors, such as progress on the credit front and new coping strategies adopted by both retailers and landlords. During the nadir of the credit markets in 2008 Sigal assumed that many big-box tenants that were then “third in a three-horse race,” as he puts it, would shutter stores en masse in 2009. After all, the lack of debtor-in-possession financing, which debtors use to pay their bills while they restructure under Chapter 11, was a major reason 2008 had been such a bloodbath.
“The big tenants went into bankruptcy in 2008 with the thought that they could get DIP financing — and it was not there,” said Sigal, whose Woodland Hills, Calif.–based firm has interests in 45 centers. “They went in, and they never came out.”
Last year, however, some of these chains managed to survive by taking advantage of a limited resurgence in the availability of credit, Sigal says. “The corporate finance business was surprisingly robust last year as far as raising capital,” he said. “That saved a lot of people.”
Even as retailers lured shoppers to their stores by offering deep discounts, they also made great strides tightening their inventories and slashing payroll and operating costs, an impressive feat, says Jeff Green, president and CEO of Mill Valley, Calif.–based consulting firm Jeff Green Partners. “Even on flat or declining sales, some retailers have now repositioned their businesses so that they are making money,” Green said. “What a surprise.”
Indeed, surprise is precisely what economists at the Washington-based National Retail Federation expressed after reviewing retailer performance during the 2009 holiday season. The NRF had predicted a 1 percent slip in retail sales. Instead, according to ICSC’s sales benchmark, U.S. retailers posted a 1.8 percent gain for the all-important November–December period.
Shopping center owners can take credit for helping to make those gains possible, but they are not exactly happy about it. “Landlords have been doing a great job of protecting their cash flows and working to give retailers rent reductions,” said Marc Weinberg, operating partner of the Shopping Center Group’s Georgia division. “They’re keeping tenants operating, rather than letting them go out and incurring the costs of putting new tenants in. It’s the devil they know versus the devil they don’t know.”
And this hints at a sobering possibility: that the avalanche of predicted store closures has merely been delayed by the smart, but ultimately ill-fated, adjustments made by both landlords and tenants. “The reality is, all these store closings were stemmed by the anomaly that is lease-restructuring,” Wiener said. “But now there is probably going to be a host of store closings in 2010 because things are still very bad.”
Mom-and-pop tenants in particular are teetering on the brink at many shopping centers. With little or no access to home-equity lines, credit cards or handouts from friends and family, they are highly vulnerable, says Sigal. “It used to be that if they were late on their rent and you gave them a three-day notice, 80 percent of the time they would find somebody to get the money from,” he said. “Nowadays, you give them a three-day notice and 80 percent of the time they’re out. They’re closed.”
When a big-box goes dark this year or next, the snowball effect could easily lead to scenarios where tenants start pleading for further rent relief that is simply no longer possible, leaving the retailers with no choice but to close and, in the worst of cases, forcing the center itself into foreclosure. This is what worries John Sebring, a director of property management at the Shopping Center Group.
“I’m concerned about those landlords who are on the verge but kept tenants open by offering them aggressive rent reduction,” he said. “Those mom-and-pops who got a little ahead of their concept are now way behind the eight ball. My 30 or 40 percent rent reduction does not mean they are suddenly OK. I’m worried about those tenants that are treading water.”