With tons of stores expected to close in the downturn, the biggest challenge to either regional or strip malls is the closing of anchor locations. A high vacancy rate or the loss of one or two anchor stores "can doom a mall, because shoppers and new tenants go elsewhere," real estate experts told The Wall Street Journal.
Anchors are expected to leave the scene through stores closings - such as Macy's decision on Thursday to close 11 stores - as well as outright bankruptcies. According to Alix Partners, a whopping 26 percent of the 182 retailers with revenues topping $500 million face a high risk of financial distress in 2009.
Among those that have already filed, Mervyns and Steve & Barry's had served as anchor tenants. Goody's Family Clothing, a sizeable mid-priced family apparel chain, announced plans this week to liquidate its remaining 287 stores. J.C. Penney, Circuit City and Office Depot also recently announced plans to close stores and Sears Holdings, Borders and Pier 1 Imports are widely expected to close locations.
Obviously, the loss of key tenants inside the mall also impacts the health of shopping centers. Linens 'N Things, Ann Taylor, Talbots, KB Toys, Eddie Bauer, Gap, Foot Locker, Levitz, Zales and Disney are just some of the retailers that have already closed stores or expect to in the coming months.
According to a survey from Reiss Inc., vacancy rates for malls and shopping centers in the 76 largest U.S. markets rose to 8.3 percent in the fourth quarter from 7.8 percent in the third, the largest increase since 1999.
While dealing with vacancies, malls profits will also be hurt by demands for concessions from existing tenants. Retailers in bankruptcy or about to file are pushing to renegotiate lower rents to stay in business. Stronger retailers are using their newfound clout in the dismal market to haggle for lower lease rates.
Although the Journal said many landlords are more open to concessions, given the economic climate, some landlords claim they're ready to let tenants fail.
"It's almost always in our best interest to keep a tenant if the tenant's viable," said Jonathan Gould, CEO of Stonemar Properties LLC, which owns stakes in 30 U.S. shopping centers. "But if the lease is well below market, I'm going to let them go out of business."
For retailers, the biggest benefit goes to those few who are still expanding and are now able to find inexpensive lease rates offered on locations previously out of their range. These include Best Buy, Costco, Kohl's, Forever 21, Au Bon Pain and Family Dollar Stores, among others.
Family Dollar, a chain of 6,600 deep discount stores, intends to open 200 stores in its fiscal year ending in August. "We are beginning to notice a little bit of softening in real-estate rates, and our real-estate folks expect that to increase over the next year or so," spokesman Josh Braverman told the Journal.
Discussion Question: What repercussions will the expected wave of stores closings, particularly of anchors, have on malls over the next several years? What will this mean for the relationship between mall managers and retailers?