by Calculated Risk on 7/08/2008 09:00:00 PM

From the WSJ: Steve & Barry's Nears Bankruptcy

Fast-growing retailer Steve & Barry's is expected to file for Chapter 11 bankruptcy protection as early as Wednesday ... A filing would be devastating to mall owners across the country, who ponied up hundreds of millions of dollars to attract Steve and Barry's into huge, empty spaces often as large as 100,000 square feet. Potentially all of those 275 stores could close ...

Steve & Barry's was the retailer we discussed a few weeks that was using up-front fees from mall owners to fuel their rapid expansion:

People close to the company's finances say most of the retailer's earnings came in the form of one-time so-called "tenant improvement" payments from landlords of $2 million to $7 million per store.

This is another major blow to already reeling mall owners. Just today Reis announced that the strip mall vacancy rate climbed to 8.2% in Q2 2008, the highest vacancy rate since 1995.

And just like for residential, there was substantial overbuilding in multimerchandise shopping space in recent years (graph repeated from earlier post).

Note that multimerchandise investment peaked at $32 billion SAAR (seasonally adjust annual rate) in Q4 2007, compared to $800 billion for residential investment (SAAR) in Q1 2006. So the scale of the problem is much smaller.

Click on graph for larger image in new window.

This graph shows investment in multimerchandise shopping space starting in 1997 in current dollars (inflation adjusted Q1 2008). The circle shows the probable period of overinvestment.

It appears that $20 billion per year or so would be a normal level of investment. However, with the recent over investment, non-residential investment in multimerchandise shopping structures will probably fall below $20 billion per year (in 2000 dollars) for a few years.