The News: Circuit City’s Demise Lengthens Shadow

Though the decision by Circuit City Stores Inc. to go out of business for good is hardly unexpected, the chain’s liquidation will add to the challenges facing retail real estate owners.Circuit City made the announcement on Friday, after efforts to sell the company fell through. In a statement, the retailer said it expected to close its remaining 567 stores by the end of March. The giant electronics chain’s decision came only a few months after it filed for Chapter 11 bankruptcy protection and disclosed plans to close 155 stores in the United States.Thus Circuit City became the retail sector’s first casualty of 2009. More are likely to follow, noted David Jacobstein, senior advisor for Deloitte L.L.P.’s real estate practice and a former president & COO of retail REIT Developers Diversified Realty Corp. Landlords around the country are already bracing for the liquidations announced last year by such national chains as Linens ‘n Things, Mervyns, Sharper Image and Steve & Barry’s.In addition, Jacobstein pointed out, other retailers will decide not to renew leases for underperforming stores, further adding to the glut. “There’s going to be a lot of square footage for the market,” Jacobstein noted. That, in turn, will lead to lower net operating income for owners that are already hard pressed by the shaky retail sector. As reported last month in CPN Sector Update, 60 percent of retailers have already reviewed their space needs or plan to do so. Among those retailers, only one-quarter intend to use new leases as a strategy to grow market share in 2009, according to a study by Karabus Management, a Toronto-based affiliate of PricewaterhouseCoopers L.L.C.Circuit City’s disappearance could be felt especially sharply in one retail-center category. Many of the retailer’s outlets are large or midsize anchors in open-air regional shopping centers, which generally offer 250,000 to 1 million square feet and serve a trade area with five- to 10-mile radii, Jacobstein pointed out.The shrinking field of national big-box players also means fewer first-rank candidates to backfill space left behind by Circuit City and other retailers. That means less attractive options for landlords. “You may have to go to fill boxes with regional and local tenants that may not be as strong creditwise and may have less pizzazz,” Jacobstein explained.  In some Class B and Class C centers, owners are already working on filling stores with non-retail uses like call centers, offices and houses of worship, he noted.