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The Honolulu Advertiser
Posted on: Sunday, January 10, 2010

More retail upheaval likely in 2010


By Roger Vincent
Los Angeles Times

LOS ANGELES Surges of large-scale retail bankruptcies such as Circuit City electronics and Mervyns department stores altered the shopping landscape in 2009 and experts say 2010 is likely to bring even more changes.

Amid a still-tepid economic recovery, big retail chains are expected to continue closing their less productive stores and retrenching on expansion plans. But at the same time, others will be hurtling into the breach to take advantage of falling rents and vacancies in neighborhoods they couldn't get into a few years ago.

"The prediction for next year is more resizing and relocating of retailers," said real estate broker Richard Rizika of CB Richard Ellis.

There are almost 100 empty big-box retail stores in Los Angeles County, according to a study by Rizika. They have a combined total of 4.5 million square feet, or more than 78 football fields' worth of vacant space for rent or sale. Most of that came from liquidated businesses Circuit City Inc., Mervyns and home furnishings chain Linens 'n Things Inc.

RISING VACANCIES

Neighborhood and community shopping centers in Los Angeles experienced falling rents and rising vacancy in the third quarter, according to real estate data provider Reis. About 5.7 percent of the space is empty, a slight increase from a year earlier.

Taking advantage of bargain rents, big-box retailers PetSmart Inc. and Staples Inc. are introducing smaller stores that will enable them to fit into more expensive or more urban locations where space is at a premium, Rizika said.

Meanwhile, bargain-chic women's clothier Forever 21 Inc., once a chain of small boutiques, is upping the ante by moving into full-size department stores abandoned by Mervyns.

Nordstrom Rack, the lower-priced cousin of Nordstrom, snagged some of the empty spots, too, but company spokesman Colin Johnson said the expansion doesn't reflect a companywide shift into selling lower-priced goods.

"This was a strategy we put in place before the downturn began," he said, and the recession has given Seattle-based Nordstrom Inc. the chance to get into new locations at bargain rates.

Also moving aggressively into big spaces vacated by failed retailers is Wisconsin-based Kohl's Corp., which added seven new stores in Los Angeles County in 2009. The mid-tier department store has assumed leases and bought empty buildings throughout California as part of a growth strategy.

Popular upscale stores such as Nordstrom are still highly sought after by mall owners, but the less-pricey Kohl's, Target and even so-called dollar stores such as 99 Cents Only have lately earned respect from landlords, said retail property expert Michael Wiener.

"Deep discounters have proliferated and will move into more attractive locations," Wiener said. "All of a sudden, they are the darlings and can have the pick of the litter."

MORE TOUGH TIMES

Wiener is chief executive of Excess Space Retail Services Inc., a New York-based company that helps retailers figure out what to do with store space they can't use anymore. With unemployment still on the rise, more tough times for stores and retail landlords are ahead, he predicted.

As many as 8,000 stores will close nationwide in the first half of 2010, Wiener said, and more grief will follow for landlords who have bank loans coming due while facing declining occupancy and rents. "We think the industry will suffer well into 2011."

Contributing to the heartache, at least for landlords, will be a source most casual observers assumed retailers had made peace with: the Internet, Wiener said. Most stores have mastered the process of selling online and will find less need for brick-and-mortar stores in the years ahead, he said.

The prediction that online shopping would be the undoing of malls was first made during the Internet gold rush of the 1990s, but instead malls thrived and expanded. "People didn't quite trust the Internet," Wiener said.

Now they're more technically savvy and the percentage of shopping they do online is probably going to get bigger. Online shopping accounted for less than 1 percent of all retail sales at the end of 1999, according to the U.S. Census Bureau. Ten years later, Internet sales were almost 4 percent of the total.

"There's still a lot of upside for the Internet," Wiener said.

SPENDING CHANGES

Also boding ill for retailers and their landlords are consumer spending patterns, a recent report by investment bank Hovde Capital Advisors said. Rocked by recession and a shaky job market, people are saving more and spending less. They also have less access to credit through credit cards and home equity loans.

"These trends do not bode well for mall fundamentals," the Hovde report said.

Mall landlord Sandy Sigal acknowledges that 2009 was tough on the retail industry, but he holds a more optimistic view of the future. Retail tenants are still suffering as sales generally continue to decline, but the rate of decline is slowing, he said.

"Last year was panic and desperation" for tenants, some of whom begged his Woodland Hills company, NewMark Merrill Cos., to let them stop paying rent, Sigal said. Now, "they are more realistic. Tenants are getting better at learning how to survive in this market."

NewMark has helped them learn by subsidizing business consultants to advise tenants and by pitching in to fund direct mail campaigns, social marketing and other advertising programs. "The idea is to teach tenants to fish," he said.

Undercover "secret shopper" surveys show service at stores is improving, he said. "In the long run, you are going to have survivors who get darn good at what they do. What's left is the best of class."

Running hot these days, he said, are drugstores, such as CVS, that offer a wide range of merchandise and keep long hours. "People use them as mini-markets now," Sigal said.

Discount stores, including grocers such as Food 4 Less, also are doing well, he said. Others are still in pain, he said.

"I wouldn't want to be in high-end clothing or jewelry right now."