Academic-minded economists may bicker over the exact moment the current recession started, but retailers want to know when it's going to end. For many, it won't be soon enough. Retail sales tumbled 2.8% in October, the fourth consecutive monthly decline, reports the Commerce Department. The sales numbers are the latest evidence that consumers are in a serious retrenchment mode.

The International Council of Shopping Centers (ICSC) forecasts that 148,000 retail establishments will close this year, which would be the largest number of closings since 2001 when 151,000 stores were shuttered. The New York-based trade group also projects that 73,000 stores will close during the first half of 2009.

In November, Circuit City Stores filed for Chapter 11 a week after it announced it would close 155 of its 721 U.S. locations to stave off bankruptcy. At least 15 major chains filed for bankruptcy in 2008. But frozen credit markets and bankruptcy law changes have pressured retailers to restructure faster than in the past, forcing more Chapter 11 filers to liquidate.

Slipping fundamentals

Against that dim backdrop, shopping center landlords are taking a hit. In the third quarter, the national vacancy rate for shopping centers reached 8.4%, an increase of 110 basis points over the same period a year earlier, according to real estate research firm Reis. Effective rents, meanwhile, declined slightly to $17.57 per sq. ft. in the third quarter from $17.60 in the second quarter, the second straight quarterly decline.

Large bankrupt chains aren't the only tenants challenging landlords. Mom-and-pop and regional retailers are struggling, too. Houston-based Weingarten Realty Investors, an owner of 329 neighborhood and community shopping centers and 80 industrial properties, for example, reported that rent hikes and new leases should have led to a $5.6 million increase in rental income in the third quarter.

Instead the company lost $6 million in revenues due to a growing number of small independent retailers that closed or didn't make lease payments, largely offsetting gains in rental income. “We are not seeing small tenants work their way out once they fall behind in rent,” remarked Johnny Hendrix, Weingarten's executive vice president of asset management, during the REIT's third quarter earnings call.

Michael Niemira, ICSC's chief economist, likens the current recession to the severe downturns of 1973 and 1981, which lasted about 16 months. Assuming the recession started in late 2007 or early 2008, he suggests that recovery could begin in late spring, though consumers will hardly take off on a shopping spree.

“We think the first half of 2009 will be very challenged in terms of retail demand,” Niemira says. “By next summer we should see some improvement, but it's going to be a slow process.”

The timing of any retail recovery is tied to improvement in the faltering housing market, and the news of late hasn't been good. In August, home prices across 20 major cities dropped 16.6% from a year earlier, according to the Standard & Poor's/Case-Shiller Home Price Indices. It marked the 20th consecutive month of year-over-year declines in home values.

The unemployment rate rose to 6.5% in October from 4.4% a year earlier, and 1.2 million workers lost jobs in the first 10 months of 2008, according to the U.S. Department of Labor. Retail store closures could account for between 625,000 and 800,000 layoffs this year, reports ICSC.

Meanwhile, the global financial crisis continues to pressure real estate owners to remain liquid as their loans mature. In particular, debt-burdened General Growth Properties was struggling to refinance or extend $1 billion in debt coming due at the end of November.

The Chicago-based mall REIT, which replaced longtime CEO John Bucksbaum in late October, suspended its dividend and was trying to sell three high-profile properties in Las Vegas to enhance liquidity. General Growth's share price plunged to about 25 cents in mid-November from more than $40 at the beginning of 2008.

Dwindling development

The outlook isn't bleak on every front. Developers are reining in construction, which could put shopping center landlords in a position to quickly fill empty space once a recovery begins.

McGraw-Hill Construction reports retail construction starts were expected to total 220 million sq. ft. this year, a 30% decline from 2007. The firm projects that developers will further reduce next year's construction starts to 188 million sq. ft., a 15% drop from this year's activity.

Some shopping center landlords suggest declining new construction will limit retailer space choices when consumer demand picks up. The lack of supply could lead to a quick return of rent growth as stores begin to expand, they say.

Other experts downplay the theory and say solid rent increases likely won't occur until 2010 or beyond. “There will be certain markets that will have a shortage of supply,” says Niemira. “But retailers are going to have to see store closings recede to feel comfortable enough to expand.”