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The Coming Retail Real Estate Nightmare

The visible signs of the carnage in the retail sector will soon be too hard for many to ignore.

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The International Council of Shopping Centers projects 148,000 retail stores will be shuttered in 2008, and another 73,000 stores will close in the first-half of this year. If these estimates prove correct, the number of closures last year will be the highest since at least 2001, and this year, closures will be on track for a similarly brisk pace.

Among these closures are those tied to the liquidation of big box anchor stores like Circuit City and as well as the closure of Home Depot’s vast Expo design centers. The result, no doubt, will be that mall owners are left with huge tracts of prominent but vacant space. The question of what to do with all the empty stores is one that is keeping retailers and retail property owners up at night.

“A growing story in 2009 is going to be the impact on the landlord,” says Michael Burden, a principal with industry adviser Excess Space Retail Services. “You’re going to see landlords really suffering.”

When an anchor departs, sometimes healthier tenants will leave the complex, while others may have the right to renegotiate their lease and pay lower rent.

Adding to the gloom, are concerns about General Growth Properties , the second-largest U.S. mall operator, which is struggling to stave off bankruptcy as it tries to refinance its debt. It may take between two to three years to work off the excess retail inventory, according to George Whalin, president and chief executive of Retail Management Consultants.

“The real estate problems are going to be around for a while,” Whalin says. “We were vastly overbuilt.”

According to David Birnbrey, Chairman and Co-CEO of Atlanta-based The Shopping Center Group, some of the hardest hit areas are those that were the hottest growth spots in recent years.

A Circuit City store in Richmond, Virginia.
Steve Helber
A Circuit City store in Richmond, Virginia.

“There was such a rapid overbuilding in these areas, reflecting a truly euphoric state of mind,” Birnbrey says.

He expects this shake-out to create better habits among consumers and retailers alike.

“Instead of operating under the premise that things can’t go wrong, retailers will be more conscientious,” he says.

Meanwhile, technology can be a big equalizer, says Don Jones, a general partner at private equity firm Kairos Capital Partners. He sees a fundamental change in consumer shopping patterns that may help retailers left behind when a neighboring tenant goes dark.

Consumers are doing a lot of research before they shop.

“Businesses have gotten pretty creative in articulating their brands without huge ‘brick-and-motar’ retail stores,” Jones says.

Questions? Comments? Email consumernation@cnbc.com

Retail