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Ghost MallsIs retail real estate about to crash?

By Daniel Gross
Posted Wednesday, Jan. 9, 2008, at 10:26 AM ET
Illustration by Mark Alan Stamaty. Click image to expand.

So far, America's real-estate agony has been confined largely to the vast residential sector. Commercial (office buildings) and retail (malls, strip malls, big boxes) real estate have held up rather well, even though those markets were propelled by the same factors that sent housing into orbit: easy credit, an abiding faith in perpetually rising asset values, and misplaced optimism about economic expansion.

But when the economy slows and threatens to go into recession, it's usually bad for all classes of real estate. And when the slowing economy is led by pooped-out consumers, it's usually disastrous for the tenants of malls and strip malls—and for their owners and lenders. All of which suggests: Get ready for the ghost mall!

The retail real estate market has already started to slow. In the third quarter of 2007, 7.4 percent of retail space nationwide was vacant, according to Reis Inc. A vacancy rate of 7.4 percent isn't tragic by any means. But it's the highest level since 2002, and it's up from 6.8 percent at the end of 2005. The third quarter of 2007 marked "the tenth consecutive quarter of flat or deteriorating retail occupancy at the national level," noted Sam Chandan, chief economist at Reis Inc., in a recent report. Thanks to continuing growth in supply and flagging demand, there was about 140 million vacant square feet of retail space in the third quarter of 2007, up from 124.4 million vacant square feet at the end of 2006.

Malls aren't turning into haunted houses just yet, but they may be on their way, thanks to the recent wholesale shuttering of national retail chains. (This column's long-standing guiding principle has been that when a naturally observed event happens three times in a relatively short time-frame, it's a trend. Like, for example, egregious right-wing hacks getting richly undeserved columns in large-circulation print publications.)

First came CompUSA, the electronics retailer that managed to make Carlos Slim Helu, one of the world's wealthiest men, a little less wealthy. Helu spent more than $800 million to buy the computer and electronics chain in 2000. But after years of losses, the Mexican billionaire threw in the towel on the brick-and-mortar business. Last month, CompUSA announced it would shut down its remaining 103 stores. The week after Christmas, Macy's, whose 850 department stores frequently anchor malls, announced it would close nine large stores in Indiana, Texas, and Ohio.

The trend continued in the first week of January. Last week, Pacific Sunwear said it would close 154 stores of its urban clothing unit, demo, "as soon as is practical" and would also shutter its nine One Thousand Steps shops.

Like Pacific Sunwear, Talbots had sought to expand its market beyond its core consumer (in Talbot's case, women over the age of 35) by introducing new retailing concepts, including Talbots Mens and Talbots Kids. But last week, Talbot's, having concluded that the kids (and the men) aren't all right, announced that it would shutter its 66 Talbots Kids and 12 Talbots Mens stores sooner rather than later.

Taken together, these closings amount to a tiny fraction of the nation's retail space. But they're indicative of a larger retrenchment under way, one that is likely to continue. America's largest chains—from Wal-Mart to Home Depot, from Starbucks to the Gap—are all in slow-growth mode in the oversaturated domestic markets. Circuit City and Sears are just two national retailers who may find it necessary to shrink their national footprints in 2008. And with consumer spending having slowed, it's much more difficult for landlords to fill newly vacated space.

Since many of America's largest mall owners are well-capitalized firms that built or acquired their properties decades ago, we're unlikely to see the carnage that has befallen publicly held home-builders. But signs of stress are emerging. Centro Properties, an Australian real estate firm that has made huge acquisitions of American malls at inflated prices in recent years, is now holding a clearance sale on its own properties.

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at . He is the author of Pop! Why Bubbles Are Great for the Economy.
Illustration by Mark Alan Stamaty.
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