Mall retailers post signs of distress

The signs that smaller, specialty retailers are struggling are unavoidable at malls across America: "Going out of business" sales at many Wilsons Leather stores. "Up to 70 percent off" at KB Toys.

At the once-sizzling Paradise Valley Mall in Phoenix, the space formerly occupied by the Bombay Co., the furniture chain that went bankrupt last year, is empty. Wilsons just finished liquidating its inventory. KB Toys, AnnTaylor and American Eagle feature posters advertising steep discounts.

Around the country, malls are starting to feel the recoil from a rapid expansion that allowed retailers to aim stores at almost every niche.

Now, consumers who are closing their wallets amid rising gasoline prices and a housing slump are forcing specialty retailers to pare back their brands. While still healthy overall, mall centers in areas hardest hit by the housing downturn, such as Paradise Valley, are suffering the most store shutdowns.

Retailers including AnnTaylor Stores Corp., Talbots Inc., and Pacific Sunwear of California Inc. have closed hundreds of stores this year. Gadget-seller Sharper Image Corp. filed for bankruptcy protection last month and plans to shutter nearly half of its 184 stores.

That retrenchment, along with the Chapter 11 bankruptcy of catalog retailer Lillian Vernon Corp., marks the beginning of a wave of retail bankruptcies.

"This is economic Darwinism," said Dan Ansell, a partner at worldwide law firm Greenberg Traurig L.L.P. and chairman of its real estate operations division.

Unless the economy dramatically improves, Ansell believes, retail bankruptcies this year could reach the highest level since the 1991 recession. More closings could leave gaping holes in the nation's retail centers, which already have seen average vacancy rates creep up to between 7 percent and 8 percent from 5 percent over the last six months, according to data from NAI Global, a commercial real estate services firm.

Part of the problem, according to Suzanne Mulvee of Property & Portfolio Research, is that more retail space is coming to the market just as consumer demand is falling.

As a result, markets such as Phoenix, which had a retail boom, are expected to see the most dramatic increases in vacancies. Phoenix's rate is expected to more than double to 10 percent by the end of 2009 from 4.4 percent late last year, according to Property & Portfolio.

In Kansas City, Mo., rates could rise to almost 17 percent by the end of 2009 from last year's 13.5 percent.

Still, David Solomon of NAI Global doesn't think the situation will be as dire as in 1991, when the savings-and-loan crisis hurt the entire country. Experts also say merchants are weathering downturns better now because of new systems to control inventory and costs.

Nevertheless, consumers are seeing fewer stores that focus on narrow niches, such as apparel for women baby boomers or clothing for surf fans. That would differ from 17 years ago, when it was the department stores that felt the major shakeup as leveraged buyouts and fierce competition led to the demise of names such as Woodward & Lothrop.

But there is one common theme with the last big decline: the power of national discounters such as Wal-Mart Stores Inc., which helped seal the demise of regional discount chains last time around.