Shopping Centers Get Creative to Fill Vacancies

The recent flurry of store closures and bankruptcy filings from national retail chains has left shopping-center owners in the predicament of figuring out what to do with all that empty space.

Occupancy of shopping centers in the country’s major markets is expected to fall by 1.2 million square feet this year, the first decline since the 1991 recession, according to projections by Boston-based Property & Portfolio Research. About 150,000 stores will close this year, according to the International Council of Shopping Centers. That’s a 7 percent increase over 2007. Gap Inc., Ann Taylor Loft, Wilson’s Leather, Pacific Sunwear of California and Mervyns have been among the chains announcing closures.

California class A centers have not been hit as hard as class B and C shopping centers, which have been doing everything from lowering rates to reaching out to the public sector to bring in some unusual tenants.

The New River Mall in Christianburg, Va., for example, recently leased space to a community college. Other malls around the country have signed tenants such as the Department of Motor Vehicles, libraries, senior-citizen centers, police substations and even a Harley Davidson dealership.

“We’ve seen landlords get very creative and turn retail space into bingo parlors, churches and indoor flea markets,” said Al Williams, a principal with Huntington Beach, Calif.–based Excess Space Retail Services Inc., which helps retailers with their property dispositions. The company’s clients include Gap, Big Lots, JCPenney and Wal-Mart, among others.

Store closures mean better business for companies such as Excess Space, whose volume is up more than 40 percent this year. The company is currently working on about 150 dispositions in California.

Williams said areas connected to the sub-prime housing crisis have been most affected. In Southern California, it’s been the Inland Empire. Williams said commercial real estate has not yet seen such a precipitous drop as residential housing. “’Yet’ is the key word,” he said.

Others agree it’s only a matter of time.

“When national chains go bankrupt, it does affect California,” said George Whalin, president of Carlsbad, Calif.–based Retail Management Consultants. “With stores like Sharper Image and Mervyns filing bankruptcy, they are leaving some big space behind.”

Real estate observers said newer centers such as Caruso Affiliated’s Americana at Brand in Glendale. Calif., will likely never see a bingo hall in its store directory, but other regional malls in key markets have brought in tenants they likely would not have looked at 10 years ago.

Santa Monica, Calif.–based Macerich has brought in discount chains such as Target Stores to its Pacific View center in Ventura as well as a Costco to its Lakewood Center mall. Macerich Vice President Phil Vice said the moves were not based entirely on filling up space but also on changing consumers’ buying habits.

“It’s dictated by the market,” he said. “Those stores are popular and were unique, being among the first of their kind to open at a mall.”

In other scenarios, Macerich has enhanced store closures such as it did at The Oaks in Thousand Oaks, Calif., where earlier this month it opened a new Nordstrom store to replace store space left behind by a shuttered Robinsons-May store.

“Closures aren’t unique,” Vice said. “They give centers a chance to deliver a new unique concept. Regardless, you’re going to see retailers working harder than ever. We’re going to be working harder in all areas, from advertising and marketing to working with our retail customers and extending our Web presence with promotions and e-mail blasts. I’m confident we’ll come out on top.”

Williams said shopping-center owners are not only dealing with store closures but are under pressure to keep existing tenants from migrating elsewhere.

“Ultimately, they are going to have to be more flexible and reduce terms or rates,” he said. “If a smaller store leaves, you have hundreds of choices to fill in the space, but as the space gets larger, you have to get more creative and maybe split up the space.”

Other methods include bringing in the non-conforming tenants.

Williams said his company’s poll of real estate brokers showed that sign-call activity has been down 30 percent to 40 percent this year. That number is related to the amount of calls brokers get from “for lease” or “for sale” signs for their properties.

Nancy Sidhu, vice president and senior economist for the Kyser Center of Economic Research, said it’s still too early to track any trends regarding the rising vacancies.

“There are so many different types of shopping centers with failing retail chains as tenants. The responses are bound to be different depending on the quality of the space being given up and the amount of competition in the local area,” she said.

Some chains that may fill in the gap include Forever 21, which is expanding across the country. American Apparel, Abercrombie & Fitch’s new Gilly & Hicks concept or Victoria Secret’s Pink stores may also take space. And British retailer Tesco PLC has landed in the United States with its Fresh Fare chain of neighborhood grocery/variety stores.

Real estate broker Marcus & Millichap has also been handling retail dispositions for clients such as Wal-Mart, which has been slowing down expansion plans.

National Director of Research Bernie Haddigan said interest has come from stores such as JCPenney. Kohl’s is also on an expansion track, he said.

To fill up the big spaces left behind by Wal-Mart, Haddigan said, the spaces are sometimes subdivided for multiple tenants.

“That can be problematic because you cut it up into pieces and the spaces in the back have no value.”

That can also bring in the odd uses such as churches, he added. Landlords are also becoming less discerning when it comes to demographics, Haddigan said, noting the Sept. 5 opening of Neiman Marcus at Westfield’s Topanga mall in Woodland Hills, Calif., where there is also a Target store.

“It shows wealthy shoppers are not foolish about how they spend their money.” In general, tenant expansion is down, he said.

“Tenants will likely be in a stronger position to renegotiate their leases.”

Paul Loubet of Irvine, Calif.–based developer Regency Centers agreed.

“Apparel retailers have changed their strategies somewhat by targeting the more core markets. They’re able to get better deals and drive some pretty tough deals. We are, however, seeing some growth. If you do the right marketing and have the right design and layout and co-tenancies, you’re going to get activity. We’re doing a lot of planning.”

Even with those additions, the retail real estate outlook isn’t good, especially since the experts are predicting another lackluster holiday season.

According to financial handicapper Fitch Ratings, regional malls will experience further store closings and weaker sales during the first quarter of 2009 as they attempt to recover from lackluster back-to-school performances and brace for a soft holiday season.

Retail loan delinquencies jumped 29 percent from July to August. Most originated from stores in Indiana, Michigan and Texas, according to Fitch.