Retailers' loss of revenue hammers city and state budgets

In the world of shopping centers, strip malls and the cities that house them, a closed Ann Taylor here or an out-of-business Circuit City there might not matter much.

But the timing and immensity of the current downturn in retail are dire, and not just for the employees who lose jobs, the company shareholders and the shoppers who no longer can buy from their favorite stores. Cities — entire regions, even — that boomed as Americans shopped till they almost dropped for more than a decade are struggling mightily because spending has almost slammed to a stop.

The resulting store closures (150,000 are expected this year), steep declines in sales taxes collected by cities and states, and the plethora of empty buildings are wreaking havoc on budgets, wrecking town center plans and ruining dreams for revitalization.

Outside St. Louis, the decline of Crestwood Court mall, which is more than half vacant, is crushing the city's budget. About half of the city's $14 million in revenue in 2008 came from sales taxes, which were down almost 10% last year.

Sears is the only major tenant left at Crestwood. Dillard's left the mall a couple of years ago, and many smaller stores have followed. The ultimate blow could be Macy's planned closing in April, but mall owner Centrum Properties is hoping to keep the existing tenants and perhaps use some of the other space for artists until it tries to convert the mall into an open-air center late next year or in 2011.

Sixty-year-old roads may not get repaired; parks may not get improved; and property taxes may have to rise.

"Most people would agree we were too heavily reliant on sales taxes for some time," says Jim Eckrich, city administrator. "But the city succeeded for a long time with those sales taxes."

So did others.

The very top few malls in the U.S. can do as much as $1 billion in sales annually, says retail real estate consultant Jim Bieri. Even an average one can do $300 million. With sales taxes that average 6% nationally going into city, county and state coffers plus the property taxes and jobs created, it's easy to see why government officials work hard to lure and keep retail developments. The revenue pays for services such as schools, police, fire and public transportation.

Yet residents are shopping far less at a time when retail revenue is needed the most.

Examples of the new retail landscape:

•Completion of large lifestyle developments in King of Prussia, Pa., and Las Vegas are being delayed, each by about a year.

•All new U.S. projects of General Growth Properties — a large mall owner and developer — are on hold. General Growth has a deadline of March 15 to cover its debt payments or restructure its debt. If it can't, the banks could take over the malls, but that's something few would be interested in, so the company would most likely continue operating them as what's known as "debtor in possession." Some of General Growth's high-profile malls include Ala Moana in Honolulu and Glendale Galleria in Los Angeles.

•Government officials in Liberty Township and Seven Hills, Ohio, have spoken loudly of their desire to land town center developments. But they didn't have any success before the downturn and aren't expected to have any now.

•At least two retail developments are delayed indefinitely in Florida's Miami-Dade County, an area that's among the hardest hit by retail vacancies. Nearby Broward County, home of Fort Lauderdale, had the biggest increase in retail vacancies last year, according to commercial real estate research company CoStar. Due in part to the reduction in revenue from retail, the growth in city services for 2009 will be less than 1%, says Michael Boudreaux, budget director for the city of Miami.

Too many stores?

Part of the problem is that the U.S. is "overstored," as retail analyst Jennifer Black and even store officials often say. Indeed, few can argue that the more than 200 million square feet of retail space added each year since 2004 was truly needed. J.C. Penney CEO Mike Ullman, chairman of the National Retail Federation, estimates that there is at least 100 million more square feet of retail space than the market needs.

This year alone, discount clothing chain Goody's announced it would liquidate its nearly 300 remaining stores. Circuit City followed a week later with news that it would shutter its 567 remaining locations, and retailers ranging from Home Depot to New York & Co. have been shuttering stores.

These and other expected closings are expected to hit already struggling areas the hardest.

"Small-market malls in the Rust Belt states and the Northeast will likely experience the brunt of these store closings," says Jeff Green, a sales forecaster and strategic analyst for malls and retailers.

These include malls where business was rarely brisk even before the recession took hold. Because such centers typically fall in areas that are the least likely to see any population growth, experts say big chains that need to downsize are likely to pull out of them first.

As for new shopping centers, even the stores that already signed leases are often trying to get out of them or are relieved that the projects are delayed.

"A lot of developments may or may not get finished," says Stuart Eisenberg, director of real estate services at accounting and consulting firm BDO Seidman. "The problem right now is the availability of sufficient funds people need to borrow. The same goes for lines of credit for the stores."

Eisenberg says, "There's no appetite from a capital perspective for new deals." Everything, he says, is on hold until the debt and equity components of deals can be re-established.

Eisenberg says several of his clients have purchased retail developments in the last three to five years and now, "No one knows how to fill them."

What to do with empty ones?

It may well be late 2010 before some of the planned shopping center development is back on track, says International Council of Shopping Centers chief economist Michael Niemira.

He predicts up to 3,000 shopping centers, mostly smaller strip centers but some larger malls, will close this year.

"If that economic activity is taken out of the community, that's a tremendous blow," says Bieri, president of The Bieri Co. in Detroit.

So what to do with all the empty retail space, especially the vacant so-called big boxes dotting the landscape with the liquidations of Linens 'n Things and what's in progress at Circuit City?

Kohl's recently announced it will take over the space in several of the liquidated Mervyns stores. In Connecticut, Texas and elsewhere, empty big-box stores are sometimes turned into haunted houses at Halloween and other kinds of seasonal stores.

Some city officials talk of turning them into community centers, but few communities have the money to run them now that their retail and residential tax revenue is so depleted. Other areas have tried subdividing them into spaces smaller merchants would use, almost like a bazaar.

Retail brand and design expert Ken Nisch jokes that given their size, some could become "evangelical churches," but short of that, the best hope for many may well be the seasonal store. Or they can be taken over by one of the only retailers doing well these days — Wal-Mart.

For now, however, empty Linens 'n Things stores are often located next to the liquidating Circuit City stores, which aren't far from Cost Plus' World Market chain, which is closing 26 of its big stores. They are blight on the horizon and sad reminders of the economy's bleakness.

For the store owners and brands willing to enter this risky market, it can be a lessee's dream come true.

Jonah Staw, CEO of clothing company LittleMissMatched, says his company has been looking to lease in A-level malls since last year. In August, only about half of the ones the firm was eyeing had vacancies. Now, he says, they all do.

Still, he's waiting to get the best possible offer, recognizing that rent deals can only get better as the economy worsens.

"We will sign deals only when we know we can make money," says Staw, whose company has boutiques in Macy's and FAO Schwarz. "That's challenging in these economic times."

In Virginia's Prince William County, which has a $190 million shortfall in its 2009 fiscal budget, leaders still hope the area can be home to several open-air retail developments known as town or lifestyle centers. Those have been seen as the key to redeveloping — or simply creating — downtown areas across the country.

But two retail developments in the Gainesville community are stalled. Stanbery Development, the developer of one planned at the entrance to a golf course, has placed that project on hold along with three others it planned elsewhere in the country. Peterson Development has postponed the expansion of the retail portion of its Virginia Gateway town center.

Such centers, with their offices, apartments, restaurants and stores, bring back the feeling of a bustling urban area. Because shoppers can park right outside the stores, they can shop more quickly or be encouraged to linger and perhaps splurge on something they see in a store window after dinner.

But with banks leery about financing retail projects and retailers backing off plans to open stores, cities and counties see hopes for these new developments dashed. It takes at least $50 million in financing to build a good-size retail strip center, and few, if any, banks are offering anything more than that.

Still optimistic

Alan Esquenazi, senior vice president of Continental Real Estate in Miami, remains hopeful.

Some markets that have been tougher for retailers to get into — New York City and California — may take a kinder approach to retail developments now.

"Because their budgets (are) being cut, they are suddenly very meaningful," says Esquenazi of retail development. "Wal-Mart is looking a lot prettier these days.

"In our industry, there really is great hope and expectation that the Obama (stimulus plan) will loosen up credit and increase consumer confidence," he says. "It could get cash registers ringing and commercial real estate back to equilibrium. Right now, everything is negative, … but there is a lot of hope."