For California shopping centers, this week’s bankruptcy filing by the Mervyns department store chain threatens to become another big headache.
Mall owners are already struggling with store closures, forcing them to keep a lid on rents or even reduce them in some cases, retail experts say. Now Mervyns says it will consider closing some locations, which would further weaken the retail rental market.
“I’ve been hearing of pressure on rents for at least six months,” said Gregory Stoffel, a retail strategist in Irvine. “Rents will continue to go down if vacancies increase.”
The closure of a Mervyns would be a harsh blow, he added, because its stores typically occupy 80,000 square feet of space -- too big for most retailers and too small for most mall anchors and discount stores.
“The Targets and the Sears and the Wal-Marts and Kmarts and the new J.C. Penney concept are bigger than that, much bigger,” he said.
Smaller shopping centers are particularly vulnerable, he added, because a “dead space” has a bigger effect with fewer stores in the center.
Mervyns, which filed for Chapter 11 bankruptcy protection Tuesday, has said it will continue operating its stores as it moves through the process.
But the Hayward, Calif.-based company also said in its filing that it had identified “a limited number” of unprofitable stores that should be closed.
The retailer would not specify which locations might be shuttered.
“It’s premature to speculate what action the company might take or what stores might be affected down the road,” said Andrew Siegel, a spokesman for Mervyns.
“The objective here is to refocus and strengthen the business so it can compete successfully for many years to come.”
For now, he added, “it’s business as usual at all Mervyns locations.”
It is common, however, for struggling companies to use bankruptcy proceedings to break leases and ditch unprofitable stores.
And any potential closures would probably be felt in California, where Mervyns operates 129 of its 177 stores.
Retail vacancy rates were up in all eight major California markets tracked by Reis Inc. in this year’s second quarter. The Inland Empire was the hardest-hit area in Southern California, with the vacancy rate rising to 7.2% from 5.2% in the same period last year.
The increase reflects the housing downturn, said John Husing, an Inland Empire-based economist.
From 2003 to 2005, as the housing market gathered steam, 80,000 people were migrating inland from the coast annually, and retailers were hot on their heels, Husing said.
Last year, as real estate turned, the migration slowed to 35,000. Many new buyers were forced to abandon their homes because they couldn’t afford the payments.
“Retail doesn’t recover until housing recovers, and housing isn’t going to recover until you cut off the flow of foreclosures,” Husing said. “And when is that going to recover? Nobody knows for sure.”
With higher vacancy rates, mall owners are forced to keep rents low and may even be unwilling to boot a tenant who falls behind on payments. That’s because a shuttered store, particularly an anchor, casts a pall over a center, experts say.
And the current retrenchment in retail means it’s tougher to find a new renter.
“Now it’s particularly bad because of the paucity of potential tenants to fill that space,” said Sam Chandon, chief economist for Reis. “It’s harder to fill the space when they’re going dark.”
Stoffel declined to speculate on which Mervyns stores might close. But he said he had reviewed sales figures at Mervyns locations as part of the analysis he conducts on shopping centers.
“There’s a couple that I looked at and shuddered,” he said.