Slumping economy leads to big box blues - East Valley Tribune: News

Slumping economy leads to big box blues

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Posted: Saturday, November 15, 2008 11:48 pm | Updated: 11:43 pm, Fri Oct 7, 2011.

Shoe Pavilion — 6 stores. Mervyn’s — 11 stores. Linens-N-Things — 12 stores. Circuit City — 13 stores. Taken together, 42 large retail stores, commonly called “big-box” stores, are closing and dropping 1.8 million square feet of real estate onto the Valley market in the next few months.

Shoe Pavilion — 6 stores.

Mervyn’s — 11 stores.

Linens-N-Things — 12 stores.

Circuit City — 13 stores.

Taken together, 42 large retail stores, commonly called “big-box” stores, are closing and dropping 1.8 million square feet of real estate onto the Valley market in the next few months. The stores leave large holes in many of the East Valley’s busy malls that will be especially hard to fill in these economic times.

“I don’t think I’ve ever seen where we’ve had this many retailers at one time, within this short of a period, go bye-bye,” said Rick Murphy, senior vice president at the brokerage firm CB Richard Ellis.

Vacancies on the rise: The retail store vacancy rate in the Valley has slowly crept up since 2006, and experts predict it to grow with more store closures in the future. Scott Kirchhofer/TRIBUNE, SOURCE: CB Richard Ellis

During past downturns, big boxes sometimes sat empty for months, hurting small retailers in centers that often drew less traffic and more decay. Some experts say the list of closed retailers will almost assuredly grow this time with sales plunging at record rates going into the all-important holiday shopping season and the phrase “consumer confidence” sounding more like an oxymoron.

“I think it’s really going to be a stinking Christmas for a lot of retailers,” said Bob Kammrath, a Phoenix real estate consultant.

OUTER FRINGES WILL BE HURT MOST

In third quarter this year, the Valley’s retail vacancy rate was 9.9 million square feet, or nearly 7 percent of the market, according to CB Richard Ellis. Kammrath, based on his own research, puts the vacancy rate at about 11 percent.

Jay McIntosh, a consultant and president of Consumer Foresight, is among those who say the worst is likely yet to come for the Valley.

A slow holiday season means more retailers will have to close stores if they want to see next Christmas, he said.

“It’s going to be essential,” he said. “This is a year when retailers are going to be trying to survive.”

Kammrath said certain retail developments will bear the heaviest burden, including those on the outer fringes of the Valley like Queen Creek and Buckeye, he said.

“I think you’ll just see wholesale closures out in those areas,” he said.

He pointed to the area around Rittenhouse and Ellsworth roads in Queen Creek where developers, who expected population and home construction would continue soaring, tried to get ahead of the market by building retail centers.

“There’s three power centers right at that intersection,” he said, referring to Queen Creek Marketplace, Cornerstone at Queen Creek and Shoppes at Indigo Trail. “You would think you were in the middle of some giant metropolis, and you’re in the middle of nowhere.”

Other projects that could take hard hits are those like Scottsdale Pavilions at Indian Bend and Pima roads in Scottsdale, Kammrath said.

The 1.1 million-square-foot shopping center, which is in the midst of a multimillion-dollar makeover, will lose a Circuit City and a Mervyn’s, leaving huge holes. A Best Buy has already left the mall and moved north.

The Pavilions’ owner, Marty De Rito of Phoenix-based De Rito Partners, said he has mixed feelings over the loss.

“Sometimes vacancy can be a plus given the fact that it allows us to redevelop a piece of property with less restrictions,” he said. “It’s yin and yang. It’s a negative because it increases vacancy and affects cash flow. It’s a positive (because) it does help to a certain point in my redevelopment plans.”

REPEAT OF THE PAST?

Some fear the Valley’s real estate market could eventually surpass the industry turmoil of the late 1980s and early 1990s, which was caused by easy credit that fueled overbuilding and was exacerbated by an economic downturn.

In 1992, retail vacant space accounted for 15 percent, or 8.1 million square feet, of the market, according to CB Richard Ellis.

Rents sank, developers and investors lost money and centers went into decline.

“Oh, I think it will be worse,” Kammrath said. “Let me put it this way — it depends who you believe on the economy. Most of what I hear is there’s no end in sight. We’re talking years here, and if that occurs it will be much worse than it was in the early ’90s.”

Others are far more optimistic, including Michael Pollack, an East Valley shopping center magnate with holdings across the Valley.

“In the 1980s, that was not a recession in real estate no matter what anybody says,” he said. “I started business in 1973. I was right on the front lines and I can tell you that the 1980s was a depression with a 'D.’ The ’80s were catastrophic. They were the worst I’ve ever seen in 36 years and I don’t see that happening here. I think we still have a lot of good retailers that are still in the marketplace, and I think that we’re going to have others.”

Thomas Woods, an executive vice president of retail properties at Colliers International, said one key difference between today’s real estate market and the market 20 years ago is that today’s isn’t as saturated with shopping centers. Rather than building huge projects on speculation, developers went forward only when they had enough commitments from retailers to fill store space, he said.

Woods added the Valley is a highly coveted area for retailers, so it should bounce back quickly when the market returns.

“We’re still in Phoenix,” he said. “To me, it’s a little bit like having beachfront property,” he said.

Bill Whiteside, vice president of property management for the Valley’s largest mall owner, Westcor, downplayed any threat related to more store closures.

He said Westcor will lose a few Mervyn’s and Circuit City stores.

“It’s really just new opportunity for us,” he said.

Whiteside pointed to Scottsdale Fashion Square, Fiesta Mall and Paradise Valley Mall, which all lost major anchor tenants after Macy’s acquired Robinsons-May.

Scottsdale Fashion Square replaced the Robinsons-May store with a Barneys, which is set to open in fall 2009, as well as 150,000 square feet of other retail space.

Paradise Valley Mall signed a lease with Costco and Fiesta Mall is constructing a Dick’s Sporting Goods store and Best Buy in the space left empty after Macy’s took over the old Robinsons-May store. Those retailers are expected to open in spring 2009.

This economic downturn and the wreckage it leaves in its wake will be no different, he said, downplaying all the doom and gloom.

“Each time there is this 'oh my gosh, what are we going to do’ attitude,” Whiteside said. “But there’s always a different way.”

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