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Increase in Area Retail Vacancies Is Modest

By Ylan Q. Mui
Washington Post Staff Writer
Monday, August 4, 2008

Retailer Linens 'n Things is closing 177 stores. Sharper Image is liquidating 86 stores. Starbucks is putting the lid on 600 locations.

Across the country, a growing number of retailers have recently gone bankrupt or are in the midst of reorganization, leaving dark, empty blemishes on the nation's shopping centers. The impact on the Washington area has been muted so far, as the region's affluence and strong job market continue to shore up consumer demand.

Nationally, retail vacancies rose to nearly 12 percent in the second quarter, the highest rate in four years, according to research firm Cushman & Wakefield. Regionally, vacancies were just one quarter of that -- 3.3 percent, up half a percentage point from the end of 2007. Rents remain close to their peak prices, with Cushman & Wakefield predicting short-term increases in hot areas such as Penn Quarter, Chevy Chase and Clarendon.

"The impact that we're seeing is still very modest," said Sigrid Zialcita, director of research for Cushman & Wakefield. But she added, "Are we out of the woods yet? Probably not. . . . People are just going to be generally cautious in this kind of environment."

Pummeled by rising gas prices and falling home values, consumers have been wary of opening their wallets, sending retailers into a tailspin. In the Washington region, unemployment rose to 3.9 percent in June from 3.2 percent a year ago, but it was the lowest rate among cities with populations of over 1 million. Household income in several counties remains among the highest in the country despite housing prices that fell 15.4 percent in May, according to S&P/Case-Shiller Home Price Indices, a widely watched measure of the housing market's health.

"Everybody's feeling something. It's just a question of what they're feeling," said Peter Framson, a principal with Green Light Retail Real Estate Services. "This market is having less of the fallout because look at the legs that balance our table."

Many of the nation's troubled retailers do not have a large presence in the region or do not plan to close many, if any, local stores. Department store Mervyns and restaurant chain Steak & Ale, both of which entered bankruptcy proceedings this week, do not have locations in this area, for example.

Three Linens 'n Things stores in the Washington area are slated for closure. Sharper Image is shutting down its four stores in the area. Ten of the hundreds of Starbucks in the region are on the hit list.

"It's less about Washington and more about their national strategy," Framson said.

Local developers and economists say they expect the region's vacancy rate to rise during the second half of the year. But Greg Leisch, chief executive of research firm Delta Associates, said the rate would have to jump by at least 1 or 2 percentage points before consumers would likely detect a change in their shopping centers. In addition, many storefronts are quickly replaced when they go dark, he said.

"There are retailers in line to take their space," Leisch said. "That's not the case in most other metropolitan areas."

Three of the region's largest malls, which are owned by developer Westfield, have occupancy rates of at least 93 percent, spokeswoman Katy Dickey said. The company's shopping center in Annapolis completed a $160 million expansion late last year with 60 new stores and restaurants. Fair Oaks Mall recycled the space once used by defunct retailer Mastercraft into a new store, Forever 21.

At Tysons Corner Center, property manager Cory Scott said the mall is close to signing deals for spaces vacated by the beleaguered Wilsons Leather and Domain Furniture, which is in bankruptcy proceedings. Madewell, a new J. Crew store targeting young women, is slated to open this month in the location that once housed retailer Bombay Company, which entered bankruptcy proceedings and liquidated its U.S. stores. Scott hopes to use the new stores to create another fashion corridor within the mall.

"Being able to get back that Bombay space and bring in Madewell is a fantastic addition to the shopping center," he said.

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