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Monday, March 22, 2010

The Pressure on Malls: More Store Closings

by Calculated Risk on 3/22/2010 02:06:00 PM

Hang Nguyen at the O.C. Register has an interesting post from the Bank of America Merrill Lynch 2010 consumer conference:

Pat Connolly, executive vice president [Williams-Sonoma Inc., which also owns Pottery Barn]: "We are committed to restoring our retail channel profitability to historical levels ... We are working diligently to restructure our portfolio of stores and optimize our sales and costs per square foot. This will be accomplished by selective store closings and lease negotiations ... Over the next three fiscal years, 25 percent of our store leases will reach maturity ... E-commerce is 30 percent of our corporate revenue and it’s very profitable ... even in this environment. The Internet and e-commerce have become the focus on our capital investment."

Sharon McCollam, chief operating officer and chief financial officer: "Every quarter last year, we increased the number of stores that we plan to close ... If we could get the deals (with landlords) done, we would not necessarily want to close stores if you could get to the profitability levels you were historically. ... However, we don’t believe that that is a strategy that can be executed. So there will be additional store closings ...
As the leases expire, Williams-Sonoma will be looking to cut the lease rates substantially, or close the stores. This is especially true in multi-store markets.

Other retailers probably have similar plans, and that means that malls will be facing rising vacancies and lower rents for some time.

For Q4 2009, real estate research firm Reis reported that the mall (and strip mall) vacancy rates were the highest since Reis began tracking the data. At the time, Reis economist Ryan Severino said:
"Our outlook for retail properties as a whole is bleak ... we do not foresee a recovery in the retail sector until late 2012 at the earliest."
The comments from Williams-Sonoma executives fit with Severino's forecast.

Note: The Q1 mall vacancy rate be released in early April, and I expect more records.