Friday, July 3, 2009

Troubled Malls

With unemployment rising and consumers being more careful with their money, it stands to reason that commercial real estate is suffering. Here are excerpts of one report which highlights some troubling news regarding some shopping malls, especially aging malls. The report does not cover most smaller strip malls and other shopping centers owned by private firms, which tend to be smaller, less profitable, and more vulnerable to a bad economy than regional malls.

America's Most Endangered Malls
Malls have a natural lifespan, as population centers shift, architecture evolves, and shopping habits change. But a sharp recession is clearly accelerating the demise of vulnerable retailers--and some of the shopping centers they inhabit. Plunging sales are one obvious reason. Many retailers are also saddled with heavy debt taken on in recent years to fund aggressive growth. And the credit crunch has made cash scarce for firms that need it most.

Those tough conditions have already driven retailers like Circuit City, Linens 'N Things, and Steve & Barry's out of business. Other chains are closing stores and slashing costs as they fight to survive. General Growth Properties, a Chicago firm that operates more than 200 malls--and owns the remnants of Century Plaza--declared bankruptcy in April and is working on a restructuring plan.

... By some estimates, about 10 percent of the America's malls could close within the next few years.

... As a rule of thumb, malls with sales of $250 per square foot or lower are struggling. "It's hard for many retailers to be profitable at $250," says Jim Sullivan of Green Street. [Green Street Advisors, an investment research firm in Newport Beach, Calif., that specializes in publicly owned real estate companies. ]

... But the following 10 malls still represent bleak snapshots of some of the weakest spots in the nation's retail economy.

Century III Mall, Pittsburgh, Pa. (Occupancy rate: 70 percent; sales per square foot: $200*). About 30 of the 120 stores at this suburban Pittsburgh mall have closed recently, including anchor tenant Steve & Barry's and KB Toys (both of which have declared bankruptcy), Old Navy, Ruby Tuesday's, and Macy's Furniture Outlet. The 30-year-old complex targets value shoppers but competes with nearby discounters like Wal-Mart and Kohl's. Other area malls with more upscale stores are doing better. Century's owner, Simon Property Group, may be looking to sell Century III.

Chambersburg Mall, Chambersburg, Pa. (62 percent; $234). Sales have held steady over the past year, but a bucolic location 60 miles southwest of Harrisburg makes this sleepy mall a perennial underperformer. K.B. Toys, Value City, and B. Moss closed their stores after declaring bankruptcy. Newcomers include discounters like Bolton's and Burlington Coat Factory, which are likely to generate little excitement.

Crossroads Mall, Omaha, Neb. (68 percent; $200*). Shoppers are fleeing this 50-year-old mall in central Omaha for suburban shopping centers that feel safer and more vibrant. The departure of Dillard's in 2008 left one of three anchor slots vacant. The Zales and Gordon's jewelry chains are also gone, along with Gap and most of the mall's food-court restaurants. According to press reports, owner Simon Property Group recently put the property up for sale.

Hickory Hollow Mall, Nashville, Tenn. (82 percent; $187). Dillard's has left, and other departed tenants include Linens 'N Things and Steve & Barry's, two of the biggest casualties of the recession. Two of four anchor slots are vacant, and the theater recently switched from first-run movies to late-run discount flicks. With a lack of retailers, the mall may convert some of its space to office use. One new tenant: the local police, who recently opened a recruiting station at the mall.

Highland Mall, Austin, Tex. (61 percent; $150*). While gleaming new stores have been springing up in some parts of Austin, this 38-year-old mall along I-35 has struggled to keep stores open--and avoid embarrassing controversies. Anchor JCPenney left in 2006, and this year Dillard's sued the mall's owners, claiming they let the mall become a "ghost town." The owners countersued, claiming that the suit is part of a scheme to help Dillard's get out of its lease early.

Palm Beach Mall, West Palm Beach, Fla. (82 percent; $250*). A year ago, the plan was to renovate this fading 42-year-old property. But that changed with the recession. Anchor tenants Dillard's and Macy's bolted within the last year, and in April, the mall's owners defaulted on a big bank payment, triggering a foreclosure lawsuit that could force the sale of the property. The power company even threatened to shut off the mall's electricity, but the bill was paid at the last minute. While remaining tenants like Sears and JC Penney await the outcome of litigation, other nearby malls are adding space and gaining customers.

SouthPark Mall, Moline, Ill. (84 percent; $225). The owners spent a couple of years trying to sell this Quad Cities landmark, built in 1974, but they finally gave up late last year. Local officials would like to see the aging property converted to a more modern "lifestyle mall" with boutiques, lounging areas, and an upscale ambiance. But modest local incomes probably can't support the major investment that would require. For now, the only upgrades at SouthPark are the construction of a few strip centers on "outlots" surrounding the mall, to be occupied by cheap restaurants and local service businesses.

Southridge Mall, Des Moines, Iowa. (84 percent; $168). The 2007 arrival of Steve & Barry's was supposed to mark a revival for this 34-year-old complex on Des Moines's South Side, which has been losing shoppers to more gentrified suburban malls. Then the discounter went bankrupt and closed its stores. The mall's owners have been trying to sell the property, and city officials have been working on ways to revitalize the entire area.

Towne Mall, Franklin, Ohio. (49 percent; $207). This aging structure between Cincinnati and Dayton has been troubled for years, as the owner, CBL & Associates, and local officials have deliberated over whether to tear it down and build something more modern. Towne Mall has one of the highest vacancy rates of any operating mall, with more closed stores than open ones.

Washington Crown Center, Washington, Pa. (70 percent; $265). Three of its biggest retailers--Macy's, Bon-Ton, and Gander Mountain--have suffered deep losses as consumers have cut spending. The mall's owner, Pennsylvania Real Estate Investment Trust, is revamping some of its properties--but not Washington Crown Centre, one of the weakest malls in its portfolio. PREIT could end up selling some of its subpar properties, which leaves this mall vulnerable.
In Connecticut, General Growth, the owners of Buckland Hills Mall in Manchester, have filed for bankruptcy.

Commercial real estate is not doing well at all