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Weak consumer spending is pushing struggling retailers close to or over the edge, and that is starting to hurt shopping-mall owners.
The latest retail casualty is Linens 'n Things Inc., a 500-store home-accessory chain, which is considering filing for bankruptcy-court protection as soon as this week. The chain, which went private in a leveraged buyout two years ago, is running short of cash, and its vendors have stopped shipping products, said two people familiar with the company.
For shopping-mall owners, it is a rude awakening from the boom times of the past few years, when consumers borrowed to furnish new homes. While vacancies should remain low, the slowdown means weaker rent growth for all mall owners and serious pain for the most heavily indebted landlords.
Stock investors are dismissing the weakness, driving up shares of retail-property owners 7.7% this year, though the sector fell 19.6% last year.
The list of weak retailers is growing by the day, including furniture seller Domain Inc., high-end jeweler Fortunoff Inc. and electronics merchant Sharper Image Corp., all of which have sought bankruptcy protection since January.
Mall mainstay Foot Locker Inc. closed 274 stores last year and anticipates 140 more closures this year. Jeweler Zale Corp. is closing 100 stores in the wake of disastrous holiday sales. Wilsons the Leather Experts Inc. is closing 158 of its 260 mall stores this year, and teen retailer Pacific Sunwear of California Inc. is closing its 153-store Demo chain.
Making matters worse, new construction will raise the total amount of retail space by 3.5% this year in the top 54 U.S. markets. But retail-sales demand, which has slowed with the economy, will justify only a third of that new space when it is completed, according to market-research firm Property & Portfolio Research Inc.
Problems with lenders are especially painful for retail landlords who bet that rising rents and falling vacancies would help them handle heavy debt loads.
Centro Properties Group, a debt-laden Australian real-estate investment trust that owns 682 shopping centers in the U.S., faces an April 30 deadline to present a plan for repaying $3.4 billion in short-term debt that it failed to pay on time earlier this year. The company recently attracted preliminary buyout bids averaging $1 per share, according to people familiar with the matter, far less than the 10 Australian dollars (US$9.27) per share it traded for last year.
U.S. mall REIT General Growth Properties Inc., while far more sound than Centro, nonetheless is seeking to refinance $6 billion in debt due this year and next. Company executives insist the REIT has many options, including equity sales and putting properties into joint ventures, to handle its debt obligations. It has funding in place for some of that $6 billion. But the deteriorating retail market isn't going to help.
In fact, conditions are likely to get worse. The International Council of Shopping Centers, a trade group, predicts nearly 5,800 store closures this year, outpacing last year's 4,600 and approaching the recent high of 6,300 in 2004. Several anchor tenants -- Wal-Mart Stores Inc., J.C. Penney Co. and Office Depot Inc. among them -- have slashed expansion plans and have delayed store openings.
While Linens 'n Things is expected to survive bankruptcy, any expansion plans likely have been shelved. The company is considering a so-called prepackaged bankruptcy, in which the company's creditors agree to a bankruptcy plan even before the filing in hopes of limiting the amount of time the company is in bankruptcy and helping improve the company's prospects upon emergence.
Deutsche Bank Securities analyst Lou Taylor forecasts that the average vacancy rate of public retail REITs will swell by two percentage points this year. Even with that setback, many REITs still will boast vacancy rates of less than 10% because of the gains they made during the recent boom. But such a decline would sap the REITs' growth in net operating income -- which averaged a 3.5% gain last year -- to something in the range of 0% to 1%, Mr. Taylor said.
The market shift has given tenants more bargaining power. In some cases, landlords are granting less-expensive rent or forgoing increases, covering more of tenants' costs in customizing their space or allowing struggling stores to move to smaller, cheaper space, among other options.
"The pendulum has swung from the landlord to the tenant," said Eric Termansen, president of retail brokerage Western Retail Advisors in Phoenix.
For example, shoe retailer Foot Locker, a top-10 tenant for most mall REITs, closed 26 fewer stores than it anticipated last year after reaching "some favorable deals with our landlords to keep some stores open," Chief Executive Matt Serra said in a call March 11.
John Johannson, senior vice president at property firm Welsh Cos. LLC, is allowing a national office-supply retailer to move from its 35,000-square-foot slot in a Welsh-owned shopping center in Minneapolis into an adjacent 25,000-square-foot space vacated by electronics retailer CompUSA Inc. Welsh didn't increase the retailer's rent and forgave the final two years of its initial lease in exchange for a 10-year extension. "We've satisfied a long-term tenant," Mr. Johannson said.
On the positive side, some retailers have plans to launch store concepts. Among the phenoms: Gilly Hicks by teen retailer Abercrombie & Fitch Co., Aerie by teen retailer American Eagle Outfitters Inc. and international upstarts such as Canadian sportswear retailer Lululemon Athletica.
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