Think 2008 is bad? Store Closings could double in 2009.
Circuit City's announcement last month that it was closing 155 stores, or 21 percent of its 721 U.S. locations, and planning to start lease renegotiations for others, will be echoed by numerous retailers throughout 2009, with the total number of stores shuttered in the United States expected to double the figure predicted for this year.
By the end of 2008, store closing announcements will total 6,100, according to an October forecast from ICSC. But that figure might reach 14,000 next year, according to industry insiders. Store closings are already projected to be up 25 percent in 2008 compared to 2007, according to TNS Retail Forward, a Columbus, Ohio-based retail consulting firm.
“My personal feeling is that we have not seen the worst of it,” says Matthew Bordwin, managing director and national co-head of the real estate services team in the Melville, N.Y., office of KPMG Corporate Finance LLC, a middle-market investment bank.
Landlords should brace themselves for tough times ahead, after already watching one tenant after another close stores, file for bankruptcy or announce liquidation. Now, even healthy retailers are getting rid of the bottom 10 percent to 15 percent of their real estate portfolios, says Andy Graiser, co-president of DJM Realty, LLC, a Melville, N.Y.-based real estate consulting and advisory firm. To keep vacancy rates in check, landlords will have to do everything in their power to help struggling chains survive when they themselves are being faced with a refinancing crisis.
As a result of massive store closings, vacancy rates will spike next year, reaching 17.3 percent by the middle of 2009, according to Property & Portfolio Research, Inc., (PPR) a Boston-based property research and portfolio strategy firm. The firm bases its vacancy projections on comparing the changes in retail space and retail sales against a predetermined benchmark of required sales per square foot in 54 U.S. markets. In 2009, PPR projects rents in the retail sector will decline 5.6 percent. The most viable option for landlords will be to try to hold on to existing tenants by reworking their lease terms, says Graiser.
With the precipitous decline in consumer spending and tightening credit, the industry should see a minimum of 10,000 store closings in 2009, says Howard Davidowitz, chairman of Davidowitz & Associates, Inc., a New York City-based retail consulting and investment banking firm.
With holiday same-store sales growth forecasted to reach, at best, very low single digits, Davidowitz and Lois Huff, senior vice president with TNS Retail Forward, both say there will be a significant number of bankruptcies in the first quarter of 2009. Those chains that are teetering on the edge right now and need strong holiday sales numbers to stay afloat will likely be pushed into bankruptcy.
During the 2008 holiday season, spending on apparel will experience zero percent growth compared with a 1.9 percent increase last year, according to TNS Retail Forward's projections, while spending on furniture items will fall 2.3 percent compared to a decline of 0.7 percent last year. The luxury sector will feel the pinch as well, though not to the same extent as midmarket retailers, says Davidowitz.
“It's basically a foregone conclusion that it will be one of the more challenging seasons we've seen in many, many years,” says Al Williams, principal with Excess Space Retail Services, Inc., a Huntington Beach, Calif.-based real estate disposition and restructuring firm. “Consumer spending has been down; if anything, by December, it could be slightly worse.”
Excess Space estimates the number of store closings for all of 2009 could increase 100 percent compared to this year, ranging from 12,000 to 14,000 stores. Chains that rely on discretionary spending, including apparel sellers, furniture stores, jewelers and restaurant operators, will be hardest hit, according to Graiser.