Watching the Malls: As Goes Retail, So Go Communities Across America

Part and parcel with our "Pooring of America" theme is the credit bubble has resulted in overbuilding of too much retail - in just about every niche. We're way overbuilt - we build for a steroid-filled (credit) demand cycle. Unfortunately, as the U.S. has moved away from building things we've replaced those jobs with careers that end and begin in said stores. So as this retail shrinkage happens, it will have a much harder hit that it would on the economy of the 50s, 60s, 70s, or 80s when "consumerism" was not the end all and be all.

We've been tracking the growing litany of failures and I expect far more in the future.

1. [Apr 11: This Day in Bankruptcies - Another Airline and our First Major Retailer]
2. [Jul 10: Another Retailer (Canary in Coal Mine Down -Steve & Barry's]
3. [Jul 21: Add Mervyn's to our Growing List of Retailers Headed to the Great Sunset]
4. [Jul 30: Bennigan's, Stake & Ale Close - File for Bankruptcy Protection]

In fact, after denying gravity for a while, our Ultrashort Real Estate (SRS), which shorts commercial REITs, has taken off of late as people realize we have too much construction of everything and rents are going to take a major hit. We were just early in this call by buying in, in 2007. (Note we cannot short individual names, but I highlighted mall REITs as the target if I could - instead we use the ETF). The market was in denial [Oct 10: Now People Worry about Retail Stocks?] for a year before finally coming to the realization much of this growth the past decade was fraudulent. I will stress: For every one large chain you read about in the paper that is relatively well capitalized and had economies of scale, you will not hear about the hundreds of "one offs" - mom and pop retail/restaurants establishments. Expect a lot of half empty strip malls by end of 2010.

CNNMoney.com is out with a story this week - the mainstream media is finally catching up to the curve. The difference is these stories still talk of cyclical closings; I believe many of these are structural - until we add population and real wealth (not fake wealth via increases in debt) we'll be at a lower level of "consumerism" for a long while.

• With thousands of stores closing in the economic downturn, the increase in empty space at the nation's shopping malls is leaving a hole in the hearts of once-vibrant communities. In some cases, one-quarter or more of shopping centers are now empty, and the decline - or even the demise - of a mall can have a devastating economic and social impact.
• When a mall closes, you have a significant loss of jobs, even though these are typically low-paying jobs," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.
• Malls also provide significant tax revenue to communities through property tax (yet another nail in the coffin of states and cities tax revenue next year) Kotval said small towns are dependent upon this money to balance budget deficits, and to fund local services and infrastructure development.

One such example

• In tough economic times, shortfalls arise - a scenario playing out in the village of North Randall in Cuyahoga County, Ohio. The Randall Park Mall has been a main source of revenue for North Randall, a suburb of Cleveland that has a population of about 1,000.
• But a challenging economic and competitive climate has crippled business - and the 32-year-old shopping center, once the largest enclosed mall in the greater Cleveland area, is closing.
• Besides jobs, he said the village's residents also depended on revenue from the mall to fund basic services such as security and free snow plowing for senior citizens. (now the money will come from? has to be higher taxes on residents at a time they can least afford it)
• Now, the demise of the mall and sluggish patronage at the racetrack have almost put the village of North Randall on "deathwatch," Jones said. The situation is so bad that the village can no longer provide its own security for its residents. "The Cuyahoga County Sheriff's Office is patrolling North Randall," Jones said. (very similar stories in metro Detroit)
• Unless the village figures out how to revitalize the 1.5 million square feet of mall space, Jones fears that North Randall "could become the first municipal fatality in North Ohio." "It could simply cease to exist as a city," he said.
• Store vacancies at regional malls such as Randall Park are up 6.6%, which is the largest increase since early 2002, according to real estate research firm Reis. (and we haven't even officially started a recession, eh?) In some malls, store occupancy rates are falling below 75%, said Ivan Friedman, president & CEO of RCS Retail Real Estate Advisors.
• One big obstacle to any type of large scale redevelopment in North Randall or anywhere else is the ongoing credit market lockdown. Industry experts said this could make it very hard for commercial real estate developers to borrow money for financing construction work.
• RCS' Friedman said the credit freeze is also forcing regional mall operators who can't meet their debt obligations to put underperforming locations into receivership, which puts control of the property in the hands of its creditors. "Usually we see three or four (malls in receivership)," Friedman said. "I've already noticed eight or nine (malls) this year and I think it's the beginning of a trend."
• PPR's Mulvee said malls are being hit hard from all angles. "More than 6,000 (locations of) national chains this year have announced closings, and 50% of those are in malls," she said.
• "Second, there's no financing available for mall operators," she said. Several of the leading mall operators have significant debt that's coming up for renewal at the end of 2008 and early 2009.
• General Growth Properties (GGP), the second-largest operator of malls, announced last month that it might sell some assets to raise capital for servicing its debt.
• "If [mall] occupancy rates go down even further then it could get very frightening out there," Friedman said (it will be... it will be - watch 2009)

Disclosure: Long Ultrashort Real Estate in fund; no personal position

Comments

[jhopelain:]

Important story and great analysis. Up until recently, there has been a logic to the patterns of retail bankruptcies starting with sellers of stuff we don't need (Sharper Image, Lillian Vernon, Fortunoff) declaring bankruptcy in February. The second wave were sellers of stuff we can easily get at places we like better (Linens ‘N Things, Bennigan’s, Steak & Ale and Mervyn's) all of which went into bankruptcy in July. With the entire economy now on life-support, all retailers are vulnerable. "Value" has become tablestakes and survivors will be the retailers that get the greatest productivity out of their assets - people, product and place. For mall operators, it's time to drive visits. One way to do this is to get local and become even more visibly and proactively part of the communities they serve.

2008 Oct 18 03:56 PM

[bearfund:]

It boggles the mind that people continue to invest in retail. The only business that might be worse is the airline business. Virtually all medium and large format retailers offer the same goods, from the same manufacturers, using the same basic format. Prices vary by how efficient the supply chain is and by how good a deal the retailer got on real estate (the other major input is minimum wage workers, mostly young people with no better opportunity, and they are fungible). Since there is no reason to pay higher prices for the same goods, the winners in retail are simply those whose cost of goods delivered is lowest. Margins are crap, leverage tends to be high, and the slightest downturn always kills off about half the crowd.

Why bother? If you're not Wal-Mart or Amazon, close your doors, pay off your debts - if you can - and give the shareholders back whatever money you have left. This is insane.

2008 Oct 18 06:21 PM

[thumb:]

Although I agree with the major premise of your writing on commercial real estate,
Using The Randal Park Mall is a poor choice to support your premise.
This mall died 20 years ago the only thing you are witnessing now it the decay of the coffin.
T

2008 Oct 19 07:45 AM

[2houndz:]

I have said this before on similar posts, but having been in the retail development business ( I worked on some of the largest malls in America with several well-known and well-heeld REITS), I am amazed at the stupidity within the industry.
For so many companies it was all about leveraging cash flowing assets with little to no regard or even understanding of a broken financial model that would begin to fail when the CAP rate and credit bubbles burst. They often failed to considered even the actual asset in terms of simple rules of real estate, including location, site plan design, sight lines and visibility, vehicular access and on and on. As long as it worked in theory and on paper, that was good enough reason to use some sucker's money to build it. And then there was usually some other sucker waiting to bid up the price for the finished product.
There were 20% fewer people at the big convention this year and there will probably be another 25-30% fewer next year. I would like to think that only the smart and strong will survive, but I know the industry and I know better.
I agree with thumb that Randall Park has been in its death throes for years and may not be a good example. Better products than Randall Park will fail (at least financially) in 09.

2008 Oct 19 01:46 PM

[The Market ...:]

2Houndz,

I would be interested if you could name 3 or 4 of what you believe to be the worst run retail mall etf's.

Thanks.

2008 Oct 20 08:55 AM

[2houndz:]

Hick -
I like that name - you from Alabama too??

I'm not a fan of the leadership at GGP. I tried to short it awhile back, but it was on the no-short list. I wouldn't short any of these today and I wouldn't buy them long either.

I think that CLP is extremely weak. When Tom Lowder picked his succesor he would have done just as well to throw a deck of cards out the window of his Mercedes and hire the guy who brought him the four of spades.

Clearly CENTRO is in a world of hurt due to their expansion stupidity. KITE and CEDAR seem weak, altho I know some folks at Kite who seem to know the score.

I think KIMCO is overall a good company, but maybe not as good as a few years ago. Good management or not, they have an aging portfolio that is slipping in ocupancy. Unless Central and South American activity pulls them along, I don't see much positive there.

My favorite REIT is PUBLIC STORAGE, but the product is not very sexy.

Please note that this is not a buy or sell recommendation. Stocks are not companies sometimes and REIT stocks have not reflected the performance of the underlying for years. I have made some money in REITS but got out in 2006 because I no longer understood it.

2008 Oct 21 04:38 PM

[dkopp:]

Cant agree more with the assesment. We have been advocating a redevelopment structure for years. It may be worth a look at our blog post. blog.symphonypropertyg...

2008 Oct 22 08:25 AM

[2houndz:]

dkopp - your website is right on track. I was the redevelopment guy on several tertiary malls across the country, and while I was trying to implement some of the very things you discuss on your blog, the bottom line is that we had to quickly create some "value" so that they could be sold to the first over-leveraged under-talented sucker who came along. We had to "sell the dream" and get the heck out before the whole house of cards came tumbling down.

Several of those same malls I worked on have been mentioned on SA in the last few days as they are going to the auction block. Several others are soon to follow as soon as the banks eventually must fess up to the fact that the owner is in arrears on a whole pile of just awful assets and they over-extended a guy who had no clue what he was doing. The chickens have come home to roost.

2008 Oct 22 06:55 PM

[dkopp:]

2hounds, you should private email me, maybe we can solve some of the problems the Mall world has. FYI, I am "intimately" knowledgeable about the auctions. If you look at my bio and who I worked for, you will put 2 and 2 together.

2008 Oct 26 08:04 AM