More Stores to Close, But Vacancy Declines

Store closings are on the rise, according to a recently released survey from the International Council of Shopping Centers, but densely populated urban areas will continue to thrive, says real estate investment services firm Marcus & Millichap.

The first half of 2008 saw announced closings of 2,831, compared with 1,522 announced closings in the first half of 2007. However, those numbers pale in comparison to 2001, when 7,041 store closings were announced. Not surprisingly, apparel stores represented 34.7% of the announced closings, followed by home entertainment stores at 28.8% of the total. ICSC projects that 144,000 establishments will be closed in 2008, a 7% increase from 2007. A recent spate of retail bankruptcies (including Boscov’s) should not be a major cause for alarm.

“Store bankruptcies are going to increase, but that doesn’t necessarily lead to store closings,” said Bernard J. Haddigan, managing director of Marcus & Millichap, Atlanta. And even those units that close stores continue to pay rent until the unit is re-leased.

Still, expect more closings, Haddigan warned.

“The food industry is softening, and small shop space is virtually dead,” Haddigan said. “Plus the industry is still developing new product.”

That has led to an increased vacancy rate across the country, according to Marcus & Millichap Research: at midyear, vacancy in the United States was 10.7%, up from 9.7% in 2007. The firm projects that at yearend 2008, vacancy will hit 11.1% nationally. More telling is where shops are staying open: Densely populated urban areas are doing well, as people seek to cut back on the cost and inconvenience of driving.

“There’s a larger trend with the District [of Columbia] and Atlanta: people are tired of the long commutes and are moving to the urban core,” Haddigan said.

At mid-year, according to Marcus & Millichap, Washington, D.C. had a vacancy rate of 4.7%, well below the U.S. average, topped only by San Diego’s 3.6% vacancy. Philadelphia posted a 6.9% rate at midyear. Meanwhile, Sunbelt cities such as Orlando (9.5%) and Dallas/Ft. Worth (15.1%), and Chicago (9.5%) fared less well. Yet rents for the most part remained steady, increasing of the shuttered stores continue to pay rent, with major metro areas mostly reporting minor rent increases, the survey said.

A comeback likely won’t occur until 2010 or 2011, Haddigan said. Until then, secondary markets and locations will struggle.

“There’s been significant development,” Haddigan said. “If space is not pre-leased there will be issues.”