Ghost Malls: Coming to Your Town

The illustration of Old West ghost towns is something that every American can relate to. During the great gold rush of the mid 1800’s in California, Nevada, and Wyoming towns sprung up out of nowhere to support the gold mining efforts of those looking to strike it rich. General stores, bars, hotels, brothels, and jails appeared out of nowhere based on demand from delusional prospectors hoping to hit the jackpot. Thousands of malls emerged throughout suburban America in the last twenty years as delusional shoppers thought they could spend their way to prosperity and achievement. Both delusions will end in the same manner.

When the gold rush ended as quickly as it started, the artificial demand collapsed and the towns were abandoned. These ghost towns sat vacant for decades, slowly decaying and rotting away. As you drive around today, you notice more and more For Lease signs on vacant retail buildings. Strip malls, inhabited by mom and pop stores, karate studios, pizza joints, and video stores have felt the initial onslaught of consumer deleveraging. As the pace of retailer collapse accelerates in 2009, larger malls will begin to go dark. Once bustling centers of conspicuous consumption and material decadence, built upon a foundation of consumer debt, will become ghost malls. Decaying, rotting malls inhabited by rats, wild dogs, and homeless former retail employees, will be a blight on the suburban landscape for decades.

For the last twenty years, the American consumers have carried the burden of the world on their broad shoulders. This has been a heavy yoke, but when you take steroids it doesn’t seem so heavy. The steroid of choice for American consumers was debt. They have utilized home equity loans, cash out refinancing, credit card debt, and auto loans to live far above their means. It has been a wild ride, but the journey is over. They can’t score steroids from their dealers (banks) anymore. The pseudo-wealth created in the last twenty years has begun to unwind, and will increase in speed in 2009.

Average Americans, who saw their faux paper wealth growing rapidly as their home values increased, took advantage of this by refinancing their mortgages and extracting the equity from their homes and spending it. They mined $3 trillion of equity out of their houses. This spending of seed corn led to the vast majority of GDP growth between 2000 and 2007.

Source: John Mauldin

Major banks offered credit cards using your home equity as a way to pay everyday expenses like groceries, cigarettes, beer, gas and clothes. Eating your house was never so easy. The enormous amount of excess home sales and equity extraction led to titanic demand for home furnishings, remodeling services, appliances, electronic gadgets, BMWs, and exotic vacations. This led to immense expansion plans by retail and restaurant chains based on extrapolation of this false demand.

A permanent psychological change has occurred in American consumers. They have lost $30 trillion in value from their homes and investments in the last few years. No amount of fiscal stimulation will reverse this psychological trauma. The savings rate will increase from 0% to at least 8%. Mike Shedlock recently described the state of affairs.

Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

Now the impact of a retrenching consumer will be felt far and wide, from Des Moines to Shanghai. Consumer spending has accounted for 72% of GDP. It will revert to at least the long term mean of 65%. David Rosenberg, the brilliant economist from Merrill Lynch, describes what will happen:

This is an epic event; we're talking about the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007. Before the US economy can truly begin to expand again, the savings rate must rise to pre-bubble levels of 8%, that the US housing stocks must fall to below eight months' supply, and that the household interest coverage ratio must fall from 14% to 10.5%. It's important to note what sort of surgery that is going to require. We will probably have to eliminate $2 trillion of household debt to get there, this will happen either through debt being written off, as major financial institutions continue to do, or for consumers themselves to shrink their own balance sheets.

Source: John Mauldin

Every major retailer in the United States has built its expansion plans on an assumption that American consumers would continue to spend at an unsustainable rate. One basic truth that never changes is that an unsustainable trend will not be sustained. That crucial assumption error will lead to the bankruptcy of any retailer that financed its expansion with excessive debt. Warren Buffett’s wisdom will be borne out:

Only when the tide goes out do you discover who’s been swimming naked.

There are at least 1.1 million retail stores in the United States according to the Census Bureau. There are approximately 1,100 malls in the United States, not counting thousands of strip centers. These numbers will be considerably lower by 2011. ICSC chief economist Michael Niemira explained, "In the midst of all this doom and gloom, it's hard to imagine it getting better... But keep in mind, what happens in strong downturns is there's a hefty pent-up demand. It's wrong to extrapolate these conditions for the next year or two." Mr. Niemira will be wrong this time.

There is no pent-up demand. If the phrase unpent-up demand existed, it would apply today. Americans have bought everything they’ve desired for the last twenty years. There is no pent-up demand if you own 20 pairs of jeans and 60 pairs of shoes. The over-spending and over-leverage will take a decade to unwind.

Source: Mike Shedlock

According to the ICSC, about 150,000 stores are anticipated to shut down in 2009, which adds to the 150,000 that closed in 2008 and 135,000 in 2007. Normally, 110,000 to 125,000 new stores open per year. At least 700,000 retail jobs will be lost. The opening of new stores will grind to a halt in 2009. Some major retailers that have closed or will close include: Circuit City -728 stores; Linens N Things - 500 stores; Bombay Company- 384 stores; Sharper Image-184 stores; Foot Locker (FL) -140; Pacific Sunwear - 153. Other large retailers are closing underperforming stores and scaling back expansion plans. By 2011, at least 15% of the existing retail base will have gone to retail heaven. With the amount of vacant stores likely to reach in excess of 200,000 and vacancy rates of new malls already at 28%, there will be no need for the construction of new stores for many years.

Most of the retailers that are closing, lease their locations from mall developers like General Growth Properties (GGP), Simon Properties (SPG), Mills Corp. (MLS), Pennsylvania REIT (PEI), Vornado Realty Trust (VNO). These developers have a quadruple whammy hitting them in 2009. Many borrowed heavily to finance massive mall expansion. The terms of these loans were generally five to seven years. The Wall Street whiz kids and their CDO machine generated the vast preponderance of financing in the last five years. According to commercial real estate expert Andy Miller, the collapse will come more rapidly than the residential collapse.

By contrast, in the commercial world, the properties are fewer and much bigger. For example, you may have ten properties in a commercial pool that ultimately works its way into CDOs. Those loans are huge. You may have a shopping center loan in there for $25 million and an office building loan for $30 million dollars. As a result, if you have a default on just one of those loans, you can effectually wipe out all of the subordinate tranches. And that is why when you see the problems begin to appear on the commercial front, it's going to be a much quicker sort of devolution than we saw on the residential side. In the commercial world, most of the financing that happened outside of the apartment business was done by conduits, and there are no more conduits left, and conduits were doing the stupidest loans you could find. They were doing an advertised 80% loan-to-value, which was usually more closely aligned to a 100% loan-to-value. They were dealing with no coverage. They were all non-recourse loans. Many of them were interest-only loans. Those loans are now gone. You can't refinance them, and if you could, the terms would be onerous.

Source: Mike Shedlock

Billions of debt needs to be refinanced in the next two years and there is no one willing to make those loans. The major mall developers are so terrified they have made an all out press to get their fair share of the TARP. As retailers go bankrupt, vacancy rates have reached 9.4% for shopping centers, according to CoStar Group. With virtually no demand, rental income is plunging. With cap rates eroding and operating expenses going up, a perfect storm will hit mall developers in 2009.

The negative feedback loop will accelerate as the year progresses and will spiral out of control by late 2009 and early 2010. The negative feedback loop will lead to major developer bankruptcies and ultimately to Ghost Malls, particularly in the outer suburbs. The positive feedback loop that got us here, made people feel wealthy, smart, and overconfident. It was awesome! The negative feedback loop is going to suck. The collapse of developers will result in more major write-offs by regional banks that financed their expansion. This go around, many smaller regional banks will feel the major pain. The U.S. taxpayer will be required to step up to the plate again and assume financial responsibility for their own lack of spending. Talk about screwed if you do, screwed if you don’t.

Mall owners and commercial developers are on the brink of bankruptcy. Commercial developer CB Richard Ellis (CBG) didn’t sound too optimistic in a recent 10Q filing:

We are highly leveraged and have significant debt service obligations. Although our management believes that the incurrence of long-term indebtedness has been important in the development of our business, including facilitating our acquisitions of Insignia and Trammell Crow Company, the cash flow necessary to service this debt is not available for other general corporate purposes, which may limit our flexibility in planning for, or reacting to, changes in our business and in the commercial real estate services industry. Notwithstanding the actions described above, however, our level of indebtedness and the operating and financial restrictions in our debt agreements both place constraints on the operation of our business.

As Americans realize that they don’t “need” a $5 Starbucks latte, IKEA knickknacks, Jimmy Choo shoes, Rolex watches, granite counters, and stainless steel appliances, our mall centric world will end. Major mall anchor retailers Macy's (M), JC Penney (JCP), and Sears (SHLD) are in for a heap of trouble in the next few years. As low prices become the only factor that drives retail sales, retailers will have minimal profits in the future, further restricting expansion and renovations.

Mall developer General Growth Properties, which owns or operates 200 malls, added $4 billion of debt in the last three years and is teetering on the brink of bankruptcy. Simon Properties, which owns or operates 320 malls, added $3 billion of debt in the last three years and will be greatly affected by the coming downturn. Many smaller developers will be in even more dire straits. With shrinking cash flow, looming debt refinancing, and dim prospects for a resumption of conspicuous consumption, Mall developers are destined for a bleak future. Picture Clint Eastwood from his spaghetti western days riding a horse through the middle of your local mall with tumbleweeds blowing past the vacant KB Toys and Victoria's Secret.

Comments

[Jason Rines...:]

The dead on reality paragraph:

'Consumer spending has accounted for 72% of GDP. It will revert to at least the long term mean of 65%. David Rosenberg, the brilliant economist from Merrill Lynch, describes will happen:

This is an epic event; we're talking about the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007. Before the US economy can truly begin to expand again, the savings rate must rise to pre-bubble levels of 8%, that the US housing stocks must fall to below eight months' supply, and that the household interest coverage ratio must fall from 14% to 10.5%. It's important to note what sort of surgery that is going to require. We will probably have to eliminate $2 trillion of household debt'

This is a five year process from beginning of 2008. I have stated it often, the next Bull market will be 2013 and will be tepid in comparison to the 80's and 90's Bull's. There will be some solid opportunity for astute investors during the reinflation attempt, no doubt. But I would caution that instead of a U or L, this thing looks like a W to me with the 1st leg down.

Jan 20 10:20 AM

[Pirate Jo:]

Wal-Mart is going to do great.

It's kind of funny, as I was reading this it occurred to me that I am one of the (apparently rare) people who never got turned on by overpriced crap in the first place. I realize this is probably more a matter of personal taste than moral superiority, but I have always despised debt. Debts trap people into jobs they hate, and I always wanted the freedom instead.

I drive an old car that's been paid off forever, and when it's time for another one I'll fork over a couple thousand bucks and buy another old car. I also hate to shop (I think because I dislike crowds), so I do it only rarely, with the goal of getting it done as quickly as possible. I can't remember the last time I carried a balance on my credit card or paid interest on it. I actually MAKE money off the thing, with the rebates.

I make a good salary that is more than I need, though, so I always used to sock money away in investments. Half of that has disappeared now, and the market doesn't show any signs of recovery soon, so that leaves me with the question of what do do with my extra money. I'm pouring it into paying off my home, which was modest to begin with and which I've never been underwater on. In another four years I'll be mortgage-free. (If only I'd been doing that instead of throwing it down the stock market rat hole for the last twelve years, I'd *already* be mortgage free.)

After that? Well I sure won't have much in the way of living expenses. No mortgage, no debt, just need to keep food in the fridge and the lights on. I'm sure the government will be trying to squeeze people like me for everything it can, trying to bail out all the dummies, but since it seems determined to keep taxing people on income, instead of doing something smart like the FairTax, I can probably use that to my advantage. Drop back to working part-time, earn less (I won't need it anyway), and start doing some cross-country touring on my bike. Working like a dog to pay for crap I don't need has never appealed to me anyway, and working like a dog to pay for other people's crap they don't need appeals to me even less. The solution is to quit working like a dog. I'm sure glad I don't have kids.

Jan 20 10:57 AM

[tazman:]

While there will be some loss of stores in malls, there are stores who are looking to expand as well. Not everyone is doing poorly. I do think we will see some small strips going dark, however the likelyhood that a major mall will be a ghost town is highly unlikely. You might see a few more dark storefronts for a while, you are not going to see enclosed malls going dark. We need to be realistic about what is happening, but we also need to be careful to not buy in to the radical doom and gloom you hear everyday. You don't want to have a self fulfilling prophecy.

Jan 20 11:24 AM

[James Quinn:]

It's happened before. It will happen again. This is not doom and gloom. The massive amount of consumer leverage will unwind and retailers will go under en mass. You can't hope reality goes away.


On Jan 20 11:24 AM tazman wrote:

> While there will be some loss of stores in malls, there are stores
> who are looking to expand as well. Not everyone is doing poorly.
> I do think we will see some small strips going dark, however the
> likelyhood that a major mall will be a ghost town is highly unlikely.
> You might see a few more dark storefronts for a while, you are not
> going to see enclosed malls going dark. We need to be realistic about
> what is happening, but we also need to be careful to not buy in to
> the radical doom and gloom you hear everyday. You don't want to have
> a self fulfilling prophecy.

Jan 20 11:44 AM

[Midwestern:]

Not everyone is totally broke. The reality is people will continue to buy, just not as extravegantly. Babies are born, children grow, and family needs change. If 10% become unemployed and an additional 10-15% are underemployed, the 75-85% fully employed will continue to work and pay taxes. Maybe if the gov't took less in income tax, more people could have met their mortgage and credit demands. Malls will condense and vacant stores will be reinvented for other uses. Free standing, neighborhood stores with front-door parking lots will be retooled for those remaining such as Penney's and Kohl and neighborhood shopping will again be in vogue.
Yes, tax what we consume rather than what we earn!

Jan 20 11:52 AM

[smiley1:]

Tazman, I like the way you think and I hope you are right. However, since I am in the CRE industry my prediction is that a number of marginal malls will die on the vine. The first domino is the loss of one or more anchor stores. In my neighborhood that's Dillard's, Macy's, Belk and a few others. Dillard's has been and will continue to close stores. If a mall loses 2 of its 3 anchor stores in this environment it will certainly die a slow, slow death, as the smaller stores can't survive on their own over the long term. Check out deadmalls.com and watch the list of 'dead malls' grow in 2009 and 2010. While I hope to goodness I'm wrong, I doubt it...particularly after reading this very sobering article. Happy shopping!

On Jan 20 11:24 AM tazman wrote:

> While there will be some loss of stores in malls, there are stores
> who are looking to expand as well. Not everyone is doing poorly.
> I do think we will see some small strips going dark, however the
> likelyhood that a major mall will be a ghost town is highly unlikely.
> You might see a few more dark storefronts for a while, you are not
> going to see enclosed malls going dark. We need to be realistic
> about what is happening, but we also need to be careful to not buy
> in to the radical doom and gloom you hear everyday. You don't want
> to have a self fulfilling prophecy.

Jan 20 11:58 AM

[Guero:]

If CBG is crying in their beer, then it is bleak. At least they are honest enough to see the coming hurricane....those bastards will be hung with billions of square feet of unleaseable office & retail space.

Jan 20 03:51 PM

[johninmontana:]

You can apply the same logic to cars. Most people have a car and in today's current economy, will pay to keep it repaired and running. If they want a new car (new or used) there are many for sale. Car lots are overflowing with inventory. Why keep building more? The market has reached the saturation point.

Jan 20 04:23 PM

[Daniel Herkes:]

The consumer is shopped out. The thrill, as the song says, is gone. Mass societal changes, like being sick of retail, are permanent. As people grow older the changes in their perceptions and values harden into certainty. I hated to shop before anyone in my immediate family grew to be that way during the past five years, Now we all go to the mall to count the dark stores. As if we had a choice . . .
Flea markets and underground stores are the way of the future, tha much is for sure.

Jan 20 06:03 PM

[battman:]

I think one of the errors you make is the simple fact that when someone loses a property through a power of sale, someone else buys it cheap enough that they can put in tenants at cheap rents to make it work whereas the orignal owner couldn't without losing too much money, so in the end, will there be "ghost malls"? I doubt it. I said the same thing back in 89 - 90 with all the Industrial that went up, and I was wrong then, and I think you've exagerated now.
Do I look forward to what is to come, no, but people are resilient, and will always find a way.

Jan 20 06:32 PM

[James Quinn:]

When someone loses a property through bankruptcy, it can sit unoccupied for years. You assume there is a buyer. If the demand has been false because of the use of debt, the stores should have never been opened. The false demand isn't coming back. Ghost Malls.


On Jan 20 06:32 PM battman wrote:

> I think one of the errors you make is the simple fact that when someone
> loses a property through a power of sale, someone else buys it cheap
> enough that they can put in tenants at cheap rents to make it work
> whereas the orignal owner couldn't without losing too much money,
> so in the end, will there be "ghost malls"? I doubt it. I said the
> same thing back in 89 - 90 with all the Industrial that went up,
> and I was wrong then, and I think you've exagerated now.
> Do I look forward to what is to come, no, but people are resilient,
> and will always find a way.

Jan 20 07:17 PM

[Commodity B...:]

To James: Grow up and stop being so melodramatic and learn how to interpret the data behind your argument.

I agree with Tazman. You will have some vacant malls, some stores will close down, but people will still shop.

An 8% reduction in consumer spending as a percentage of the US GDP hurts, but it is not a doomsday number.

These malls will eventually be redeveloped. In retail, there has been a significant shift in the last 10-15 years to outdoor, pedestrian friendly shopping and away from the titan malls of the 1980s. These outdoor malls (and there are a few in my area) have done quite well and are not in danger of becoming ghost town.

Jan 20 07:43 PM

[battman:]

When it's sold under power of sale, it sells cheap enough for someone to buy it. I think your viewing it as individual stores is inaccurate. You have to look at someone buying a whole plaza or an entire mall where the vacancy may be 10% - 20% - 30% or whatever it is. You won't find a mall that is 100% vacant, and if there are existing tenants, the leases can be renegotiated to help ensure they stay open and if stores stay open, they can lure new tenants. That's the way it's been done before and most likely the way it will be done again. I suspect there may be some ways to make easy money with all the government bailouts allowing banks to write off some of their bad loans to property owners allowing them to sell assets cheaper than they would have normally, giving buyers more ultimate upside.


On Jan 20 07:17 PM Jim Quinn wrote:

> When someone loses a property through bankruptcy, it can sit unoccupied
> for years. You assume there is a buyer. If the demand has been false
> because of the use of debt, the stores should have never been opened.
> The false demand isn't coming back. Ghost Malls.

Jan 20 07:45 PM

[Steven Hansen:]

Jim, another great article.

i would like to reinforce one of your points:

"Billions of debt needs to be refinanced in the next two years and there is no one willing to make those loans."

commercial debt is not like residential debt. there are no 30 year loans. the terms are more likely 5 or possibly 10 year with little pay down on the principal. at the end of the period, the loan needs to be refinanced.

but financed against what? commercial real estate's value is determined against projected revenues. with revenues falling, chances are many properties are already under water. And the lender has to accept a lot of risk in guessing the level of economic contraction.

but that does not mean the malls will close - there will just be foreclosures with a vulture stepping up to buy - or the banks and the developers agreeing to a haircut. in the worst case scenario where the operating cost of the mall falls below projected revenue, the mall closes.

IMO, this wave of bankruptcies will not effect GDP significantly as this sector is already the walking dead - and the developers have not been contributing to GDP for a long time. GDP does not calculate any loses in real estate, and the stores in the mall which do contribute to GDP are a separate issue and will not be effected.

what will be effected is the banks. our financial sector is also the walking dead. the banking system is bankrupt. they have so many bad loans. the government will have to backstop this. yes boys and girls - another $2 trillion of "bailout", or "subsidies", or "stimulus" - use whatever word blows your skirt up.

Jan 20 08:13 PM

[Zeon:]

It's funny how people like to wallow in the doom and gloom. GDP is expected to decline by 2 percent during 2009. Hardly a depression-level statistic. Consumers will continue to pull back, of course, and it will become hip to be frugal but it won't last. Human nature doesn't change overnight, not even at the point of a gun. The next recovery will be different from previous recoveries, just as the cause of the recession is different. But boom will follow bust as usual. It's the American way.

Jan 20 08:35 PM

[Buddy Fox:]

Zeon,
"GDP is expected to decline by 2 percent during 2009" what, from the same economists that predicted 2008 so well in 2007?

If credit growth goes to zero let alone negative it cuts 7-8% from consumption alone.

Jan 21 12:20 AM

[Sentinel:]

Zen, your problem is you believe economists who use and believe government stats in makling their forecasts.

Go to Shadow Government Stats.....

www.shadowstats.com/al...

If we computed GDP like we used to you would see that we are already at negative 3.5% GDP and dropping like a rock.

But time will tell the truth better than any stat or economist.

And so will the empty malls and big box retail stores.

I wonder how many low-income housing units you could fit inside a typical Circuit City?

Jan 21 04:31 AM

[James Quinn:]

People will shop. You truly don't get it. Retailers overestimated future demand by billions because they extrapolated the false demand blown up by mortgage equity withdrawal. I worked for a big box retailer for 14 years and I know exactly how sales forecasts are generated. There will be ghost malls aplenty. Wake up and smell the coffee Bubble boy.


On Jan 20 07:43 PM Commodity Bubble Proponent wrote:

> To James: Grow up and stop being so melodramatic and learn how to
> interpret the data behind your argument.
>
> I agree with Tazman. You will have some vacant malls, some stores
> will close down, but people will still shop.
>
> An 8% reduction in consumer spending as a percentage of the US GDP
> hurts, but it is not a doomsday number.
>
> These malls will eventually be redeveloped. In retail, there has
> been a significant shift in the last 10-15 years to outdoor, pedestrian
> friendly shopping and away from the titan malls of the 1980s. These
> outdoor malls (and there are a few in my area) have done quite well
> and are not in danger of becoming ghost town.

Jan 21 07:43 AM

[James Quinn:]

A mall depends on its anchors. If the anchors go dark, the mall dies. Sears is dying. JC Penney and Macy's are on the ropes. The developers are tettering on the verge of bankruptcy. I'm sure last summer you thought the banking system was just having a little downturn. Deal with reality.


On Jan 20 07:45 PM battman wrote:

> When it's sold under power of sale, it sells cheap enough for someone
> to buy it. I think your viewing it as individual stores is inaccurate.
> You have to look at someone buying a whole plaza or an entire mall
> where the vacancy may be 10% - 20% - 30% or whatever it is. You won't
> find a mall that is 100% vacant, and if there are existing tenants,
> the leases can be renegotiated to help ensure they stay open and
> if stores stay open, they can lure new tenants. That's the way it's
> been done before and most likely the way it will be done again. I
> suspect there may be some ways to make easy money with all the government
> bailouts allowing banks to write off some of their bad loans to property
> owners allowing them to sell assets cheaper than they would have
> normally, giving buyers more ultimate upside.

Jan 21 07:46 AM

[James Quinn:]

-2% GDP. Are you reading economist predictions? Go back to January 2008 and look up their predictions then.

I love to read the thoughts of people who refuse to deal with reality. The fake boom is over. If you are looking for the great Obama recovery of 2009, you are going to waiting a long time.


On Jan 20 08:35 PM Zeon wrote:

> It's funny how people like to wallow in the doom and gloom. GDP is
> expected to decline by 2 percent during 2009. Hardly a depression-level
> statistic. Consumers will continue to pull back, of course, and it
> will become hip to be frugal but it won't last. Human nature doesn't
> change overnight, not even at the point of a gun. The next recovery
> will be different from previous recoveries, just as the cause of
> the recession is different. But boom will follow bust as usual. It's
> the American way.

Jan 21 07:50 AM

[battman:]

You're assuming every retailer is going broke. Yes I agree then, if EVERY retailer goes broke, then malls will be ghost towns. The reality, which you don't want to see because of your 14 years experience is not EVERY retailer will go broke. Cineplex Odeon as an example filed for bankruptcy and restructured and now are stronger than ever. Some landlords get screwed, some suppliers get screwed, but things go forward and we're still watching movies. The same will happen with the real stores. If they have a good story, they will reorganize if need be, shut some underperforming stores, screw some landlords, some suppliers and stay open for business.

It isn't rocket science, landlords and banks don't benefit from empty space, so when they can, they will work with tenants.

On Jan 21 07:46 AM Jim Quinn wrote:

> A mall depends on its anchors. If the anchors go dark, the mall dies.
> Sears is dying. JC Penney and Macy's are on the ropes. The developers
> are tettering on the verge of bankruptcy. I'm sure last summer you
> thought the banking system was just having a little downturn. Deal
> with reality.

Jan 21 08:31 AM

[James Quinn:]

I'm not assuming every retailer goes broke. I'm also not assuming every mall becomes a ghost town. I said in the article, that the malls in the outer suburbs are most in danger. There are 1,100 major malls in the country. Many were developed on a false demand premise. If expected demand was overestimated by 20% (very likely), then many retailers overexpanded and will have to close underperforming stores, even if they don't go bankrupt. The Mall of America and King of Prussia mall will be OK. The marginal malls (there are many) will go dark. Of those 1,100 malls, 100 to 200 will go dark in my estimation.


On Jan 21 08:31 AM battman wrote:

> You're assuming every retailer is going broke. Yes I agree then,
> if EVERY retailer goes broke, then malls will be ghost towns. The
> reality, which you don't want to see because of your 14 years experience
> is not EVERY retailer will go broke. Cineplex Odeon as an example
> filed for bankruptcy and restructured and now are stronger than ever.
> Some landlords get screwed, some suppliers get screwed, but things
> go forward and we're still watching movies. The same will happen
> with the real stores. If they have a good story, they will reorganize
> if need be, shut some underperforming stores, screw some landlords,
> some suppliers and stay open for business.
>
> It isn't rocket science, landlords and banks don't benefit from empty
> space, so when they can, they will work with tenants.
>
> On Jan 21 07:46 AM Jim Quinn wrote:

Jan 21 08:39 AM

[Fred in Ont...:]

Yes, some Malls will go dark, but don't underestimate inventiveness and creativity in the market that may transform some of them into indoor sports complex's, bingo halls, schools, flea markets, big RV and car showrooms, conference centers, hostels for homeless or who-knows-what.

Think about the European gothic town model where all shops are withing easy bicycle distance to where people live. If you can peddle your bike to the mall - then it just might survive.

Jan 21 09:54 AM

[notsosmart:]

pirate joe -right on. my house paid off in 20yrs(30 yr.mort.)drive 18 yr old car,all cards paid off monthly,collect rewards in cash.never had heloc.more stuff than i need.the dumb-dumbs should have known the roof over your head is not an atm machine. its not an investment its a liability.other than food most folks should have enough crap.pay off your debts & save.get smart -dont pay interest.

Jan 21 10:20 AM

[phaf:]

Jim, spot on once again.
All you folks saying the doom and gloom is overblown haven't lived in the variety of American cities that I have, where it's been easy to find malls and strips on the ropes, even before this crisis hit. As written in the above article, there will be vacant malls littering the American suburbs, no doubt about it.

Ever go walking in the woods after a big windstorm? Dead limbs and downed trees everywhere. Look closely at the fallen trees and you will see that most were diseased. The ultimate outcome is not catastrophe for the forest; rather that storm was a boon, as it brought down the dead wood and opened up the forest to give more light to the stronger trees, which then can grow faster and stronger to end up with a stronger forest.

We're in an economic windstorm, and that sucks for all those that will be felled, but in the end we'll end up in a better position at some point down the road.

Jan 21 10:38 AM

[Dave Eriqat:]

While sympathetic to those retail workers who will lose their jobs, I welcome the coming retreat from our retail-consumption economy. There really is far too much retail activity in this country. And there is far too much consumption as well, especially compared to the diminishing amount of productive activity.

Dave - Erstwhile Urban Wanderer

Jan 21 12:01 PM

[OldNavySailor:]

Jim,

What about the impact on tax revenues for local municipalities? I assume governments still collect property taxes even though the occupancy rate for malls, shopping centers, professional complexes, etc. have fallen.

Are there any statistics showing the potential loss of property tax income if these developers go bankrupt?


On Jan 21 08:39 AM Jim Quinn wrote:

> I'm not assuming every retailer goes broke. I'm also not assuming
> every mall becomes a ghost town. I said in the article, that the
> malls in the outer suburbs are most in danger. There are 1,100 major
> malls in the country. Many were developed on a false demand premise.
> If expected demand was overestimated by 20% (very likely), then many
> retailers overexpanded and will have to close underperforming stores,
> even if they don't go bankrupt. The Mall of America and King of Prussia
> mall will be OK. The marginal malls (there are many) will go dark.
> Of those 1,100 malls, 100 to 200 will go dark in my estimation.

>
>
>
> On Jan 21 08:31 AM battman wrote:

Jan 21 01:21 PM

[John Lounsbury:]

Jim - - -

Thanks for the article. What some people don't realize is that the over-expansion in retail real estate is a nearly national phenomenon. We have had some localized problems with retail space over-supply during the past 30 years, but this is much more widespread.

I have one problem. I can't understand your chart showing construction starts and deliveries since 2001. Construction starts are much lower than deliveries. This implies a large pent-up demand, but then there would have to be some source of supply besides new construction. Does deliveries include re-lease and resale in addition to deliveries of new construction? Your statement of lack of demand is supported by the increasing vacancy rates for deliveries, but the percentages shown for every year through 2007 seems much larger than the size of the green block would indicate. Is this related to my previous question regarding new deliveries and "retreads"?

Jim, can you clarify? If I am just missing something obvious, don't hit me too hard.

Jan 21 02:54 PM

[h2oworks:]

What a great discussion. Here is my two cents.
Shopping at the mall became/is entertainment. If some malls close, what will those folks do to entertain themselves? And you have to figure those folks probably don't have as much money as they did a year ago.

If my premise is correct who benifits? Where will discretionary dollars go?

Jan 21 03:45 PM

[Pirate Jo:]

"Shopping at the mall became/is entertainment. If some malls close, what will those folks do to entertain themselves?"

Good point. Based on my limited observation, most of the people at shopping malls are excruciatingly annoying teenagers. With the malls closing down, they will probably stay home and drive their parents nuts.

Jan 21 04:09 PM

[James Quinn:]

I got the chart from Mike Shedlock's site. I think the explanation is that there is a very long lead time from construction start to delivery for a mall. The heavy starts may have happened in the late 90's and early 2000. I know a big box store has a 2 year start to delivery time.


On Jan 21 02:54 PM John Lounsbury wrote:

> Jim - - -
>
> Thanks for the article. What some people don't realize is that the
> over-expansion in retail real estate is a nearly national phenomenon.
> We have had some localized problems with retail space over-supply
> during the past 30 years, but this is much more widespread.
>
> I have one problem. I can't understand your chart showing construction
> starts and deliveries since 2001. Construction starts are much lower
> than deliveries. This implies a large pent-up demand, but then there
> would have to be some source of supply besides new construction.
> Does deliveries include re-lease and resale in addition to deliveries
> of new construction? Your statement of lack of demand is supported
> by the increasing vacancy rates for deliveries, but the percentages
> shown for every year through 2007 seems much larger than the size
> of the green block would indicate. Is this related to my previous
> question regarding new deliveries and "retreads"?
>
> Jim, can you clarify? If I am just missing something obvious, don't
> hit me too hard.

Jan 21 04:31 PM

[James Quinn:]

I don't think the dollars were really discretionary. They were borrowed.

Instead of going to the Mall and eating at Cinnabon, maybe they'll take a walk in a state park.


On Jan 21 03:45 PM h2oworks wrote:

> What a great discussion. Here is my two cents.
> Shopping at the mall became/is entertainment. If some malls close,
> what will those folks do to entertain themselves? And you have to
> figure those folks probably don't have as much money as they did
> a year ago.
>
> If my premise is correct who benifits? Where will discretionary dollars
> go?
>

Jan 21 04:34 PM

[James Quinn:]

Municipalities will get hammered if malls go dark. The local governments assumed that the tax revenue from wage taxes and housing sales would continue permanently. That tax revenue is drying up. This is why municipal bonds have sold off so badly. The market sees municipal bankruptcies soaring.


On Jan 21 01:21 PM OldNavySailor wrote:

> Jim,
>
> What about the impact on tax revenues for local municipalities? I
> assume governments still collect property taxes even though the occupancy
> rate for malls, shopping centers, professional complexes, etc. have
> fallen.
>
> Are there any statistics showing the potential loss of property tax
> income if these developers go bankrupt?

Jan 21 04:37 PM

[DiverCity:]

Folks, you've got to be able to extrapolate. To say that the malls will be used for shelters or churches or what not, and that this somehow lessens the impact of the anticipated retail failures, ignores that if they do result there won't be a lot of money spent on geegaws that are sold in the mall, that employment will contract greatly, and that property tax revenues will plummet. This is a microcosm of what is happening with the velocity of money -- it's slowing precipitously. It's a very vicious deflationary maelstrom that feeds on itself. Social mood has indeed changed for many (but of course not all) Westerners. Pocket books are closing and it's hard to pry them open because people fear losing their jobs and the consequent inability to pay off all the ridiculous debt they've incurred. In short, I think you ignore what Mr. Quinn says at your own peril if you think it's all just pessimistic gloom and doom.

Jan 21 06:57 PM

[Dan H:]

The Chineese have lots of money, maybe they will buy our malls, office buildings and homes on the cheap. (the banks own them you know)

When banks absolutly need to raise captial, the banks will call the loans, take the properties even if no payments have been missed!

When the Chineese call the loans, there will be war or they will own everthing. We had better bring our military home and default on these loans and keep our form of government. We have been sold out by our stinking government and big investment houses.... Maybe what we need is a revolution.

Jan 25 06:01 AM

[Rdan:]

Jim,

While the discussion here is okay, could you write another post putting our troubles in the context of global trade and our trade deficit. I fear that only a national point of view underestimates our problems.

And then cross-post? Stormy and Movie Guy have clear understandings of the global nature of economies.

Jan 25 08:06 AM

[prepalaw:]

"Ever go walking in the woods after a big windstorm? Dead limbs and downed trees everywhere. Look closely at the fallen trees and you will see that most were diseased. The ultimate outcome is not catastrophe for the forest; rather that storm was a boon, as it brought down the dead wood and opened up the forest to give more light to the stronger trees, which then can grow faster and stronger to end up with a stronger forest. "

This is true in the LONG TERM.

I own timberland. A bad wind/ice-stormstorm permanently destroys the value of the damaged trees. Many of those trees were healthy. It takes between 80 to 100 years to grow a tree to maturity in the NE. An owner is lucky if he can collect harvest money every 20 years from a forest of "uneven" aged trees.

Most of the time, you can not do a "salvage cut" to try to recover some money from the trees on the ground. The reason is that your equipment will damage some good, but immature trees.

Timber is a capital-intensive business. And, you do not replant trees on poor ground.

The damaged part of the forest looks very ugly for 5 to 10 years, until the downed trees and branches are partially disintegrated by rot.

There is no joy in visiting a partially boarded up shopping mall.

Highly leveraged mall owners will be destroyed. The new owners will have to find other uses for the properties. There will be big real estate tax reductions, which will hurt to local community and drive up property taxes for homeowners/shoppers.

We are talking about the destruction of great value - it will take at least 5 years to stabilize commercial real estate.

Jan 25 10:57 AM

[Frankenkittie:]

James,
I am new to this site, and wonder, what is your financial advice to a young couple with a new baby who both have managerial positions in retail stores? We just bought a house last year that needs some minor updating, and one car loan. We are doing pretty well now, but have never had a dime extra before last year. Our loan is good, and our rate is fixed. I have to admit though, I am scared that if either one of us lost our job, it would all go down the drain.

Jan 25 01:55 PM

[James Quinn:]

The basic advice I'd give is pay down debt, try to build a 6 month emergency cash fund, be the best managers in your respective stores, and hope for the best. If the retailers you work for are value oriented, they should do OK. If they appeal to the high end, they will struggle.

Jan 26 09:52 AM

[johngonole:]

Agree with everything you said except for the kids thing. I was once like you now we are expecting our third. Kids are great.


On Jan 20 10:57 AM Pirate Jo wrote:

> Wal-Mart is going to do great.
>
> It's kind of funny, as I was reading this it occurred to me that
> I am one of the (apparently rare) people who never got turned on
> by overpriced crap in the first place. I realize this is probably
> more a matter of personal taste than moral superiority, but I have
> always despised debt. Debts trap people into jobs they hate, and
> I always wanted the freedom instead.
>
> I drive an old car that's been paid off forever, and when it's time
> for another one I'll fork over a couple thousand bucks and buy another
> old car. I also hate to shop (I think because I dislike crowds),
> so I do it only rarely, with the goal of getting it done as quickly
> as possible. I can't remember the last time I carried a balance on
> my credit card or paid interest on it. I actually MAKE money off
> the thing, with the rebates.
>
> I make a good salary that is more than I need, though, so I always
> used to sock money away in investments. Half of that has disappeared
> now, and the market doesn't show any signs of recovery soon, so that
> leaves me with the question of what do do with my extra money. I'm
> pouring it into paying off my home, which was modest to begin with
> and which I've never been underwater on. In another four years I'll
> be mortgage-free. (If only I'd been doing that instead of throwing
> it down the stock market rat hole for the last twelve years, I'd
> *already* be mortgage free.)
>
> After that? Well I sure won't have much in the way of living expenses.
> No mortgage, no debt, just need to keep food in the fridge and the
> lights on. I'm sure the government will be trying to squeeze people
> like me for everything it can, trying to bail out all the dummies,
> but since it seems determined to keep taxing people on income, instead
> of doing something smart like the FairTax, I can probably use that
> to my advantage. Drop back to working part-time, earn less (I won't
> need it anyway), and start doing some cross-country touring on my
> bike. Working like a dog to pay for crap I don't need has never appealed
> to me anyway, and working like a dog to pay for other people's crap
> they don't need appeals to me even less. The solution is to quit
> working like a dog. I'm sure glad I don't have kids.

Jan 29 12:47 AM

[johngonole:]

Agree that some Malls going dark but only to the degree that consumer spending slows. Say consumer spending drops 20% and sustains that level. Then I expect the total retail sales channel to drop 20%. Remember long term the market acts to balance supply and demand. It does this through prices. The weaker players will exit the market. There are plenty of clothing retailers like American Eagle, even build a bear who carry or did carry very little debt. Most of these mall retailers lease so they will close stores down as they need to by not renewing leases. The highly leveraged developers will go broke but assets are assets. The assets will be sold to someone else as some price. So the malls will remain and lease rates will drop with developer bankrupcies. Lower prices will allow more retailers to find viable business models.

Also I've seen strip malls that least or sell their space to governments. Many strip malls will convert from retail into other things.

I think those in the structural engineering business like myself are going to have a very tough next 5 years.

Jan 29 12:59 AM

[Anonymous99:]

When imports come to a complete standstill, even imports from other states, those who do not have jobs will be farming. And, when you need some of that food, you better be able to furnish what the farmers want in exchange....and it isn't going to be money.....and it isn't going to be gold or silver. What a surprise you are all in for!

Jan 29 03:12 AM

[bagpiper:]

Folks,
Only 1 of you gets it...the "infinite growth on a finite planet" paradigm, is DONE. And he's right, we're in a MALTHUSIAN level crisis, get a clue, forget the standard "it always comes back" thinking, it ain't....
This all started unraveling when oil got to $147 a barrel...and some guy sitting out there couldn't make his mortgage payment anymore...ok? Its simple.
We've passed Peak Oil, only a little demand destruction has resulted(1-2%)...and undershoot has destroyed the oil developers. Cheap oil with concurrent financial disaster, has shut down projects and placed others on hold.
In the end, the modern global economy, is entirely dependent on cheap energy and oil products(fertilizer, plastics, chemicals, etc). Those days are coming to a close, you can argue all you want, but production cannot keep up and is now rapidly falling 'off the curve'. Mexico, is coming unglued, their production is crashing.
When this problem hits, hinted at by Obama, you will all be in utter shock. Simple solution? Learn to farm, learn a craft, get right with God.
"a measure of wheat for a penny, and 3 measures of barley for a penny, and spare not the oil and the wine" Rev 6:6, is almost here. The PTB, are initiating a die-off, in order to "balance" the Earth. Get ready for EMoney and the chip in your hand, its coming, even at the door.
PS: I work for bankers, we're done...this is not a drill.

Jan 29 09:00 AM

[America's E...:]

Ghost malls like ghost towns require the complete exodus of the majority of the population in the ghost mall area. Where is the ghost mall population going? It will go to where the grass is greener. The malls in the greener grass areas will have to expand and hire at least some of those displaced from the "ghost mall" areas. People in order to survive have to eat, and stay warm and if they can afford it, stay cool when weather conditions aren't perfect. They may also need clothes, doctors, nurses, medicines and hospitals. They and their children will also need teachers, school buildings. So ghost malls can't happen if the population is not willing for any reason to move to the greener grass areas. Check the history of West Virginia since 1930.

The root cause of the predicted ghost malls, or even partially abandoned malls is the failure of our "loose" credit banking system. Incidentally it caused the GREAT DEPRESSION of the 1930's. In both instances booms caused by unbridled capitalism have led to the GREAT DEPRESSION and the so called "recession" we are all in right now.

Due to unbridled capitalism running rampant every one of our Major Banks who require a bailout should be nationalized. Our post office is nationalized. History will show that most of our past congressmen and former presidents were responsible by either omission or else (even worse) commission for the banking fiasco by literally allowing easy credit to anyone that had one foot on a banana peal and the other foot in the grave, and allowing banks to make each $100 loans with only $2.50 in the bank. When 3% of the loans began to default all hell broke loss and is still falling deeper into the hellish chasm. The same thing happened in 1929, with our "leaders" blessing allowing unbridled capiitalism to run rampant , in the late 1920's anyone that had $5.00 could own $100 worth of stock. When the stock dropped $6.00 (and later even more) the owners jumped out of tall buildings. Sound familiar? Ponzi schemes encouraged by the useless incompetent SEC helped cause more problems to uncontrolled capitalism.

Capitalism without tight regulation (abandoned after Teddy Roosevelt was our president) was and is as bad as by those governing as governments espousing communism or socialism without completely moral people in their entire populations led by communist or socialist governments. In Communist countries everyone had a job and a paycheck but not everybody actually worked. When somebody decided he or she wanted a day off, they took it and still got paid. Fellow workers caught on and felt they were being taken advantage of and in retaliation did the same and enjoyed their freedom. Incentive to actually work disappeared. That immoral behavior spread throughout the population like cancer. Another major fallacy with communism or socialism is that no innovation is allowed or encouraged because there is no profit incentive to the inventor as those that govern are against profits and any invention disrupts the status quo as jobs would be lost in the disruption of the status quo. In communism and socialism innovation is not wanted and is a no-no, a philosophy that unions and liberals espouse - a faulty philosophy that further caused the downfall of the entire Soviet Empire which included their Communist neighbors' Governments. Also is why Cuba is and has been a disaster since unregulated capitalism was overthrown by Fidel Castro and his followers. Innovation that is rewarded by profits (a no-no espoused by liberals, socialists and communists alike) made capitalist products superior to drab communist products. A black market with the selling of capitalist products in communist governed countries grew like crazy. Communism and socialism espouses that the worker is king not the consumer who was treated as a lowly peon. Consumers in those communist countries preferred capitalist products over inferior communist products.

The solution to the economic problem that most of their former and present colleagues caused, is through regulated capitalism that can be put into law by our American President, the House of Representatives and the Senate. Most of the solution via Regulated capitalism follows:

(1) Nationalize every bank (BB) that has already got a government taxpayer bailout that exceeds its present overall market value. Pay off all present stockholders of each (BB) bank at the present market value. Sell it back to each former stockholder that sold their shares to the government at the same price it was purchased plus any additional cost per share it takes the government to make the problem bank solvent. If former owners don't want to purchase back their stock, sell the stock on the open market.

(2) Eliminate the capital gains tax entirely until the GDP returns positive for at least 6 quarters unless an economic boom occurs much earlier. At that time if needed, reinstitute a capital gains tax to help pay down the national debt.

(3) Rebuild our infrastructure. Create jobs by replacing dirt roads with paved roads, and burying residential and commercial electric, telephone and cable power lines. Tear out environmentally and physically damaged highways and pave them. The same should be done with existing bridges. Tear down all commercial signs that glut our scenery. Tear down empty buildings and replace them with farmland or lawns. DO NOT PAY ANYONE because he or she is not working if that person is found physically and mentally able to do so.

(4) Reduce income taxes for all by the same percentage. Increase them only when an economic turnaround last for 6 quarters, unless an economic boom occurs sooner.

(5) Do no allow short selling when the overall stock market drops more than 10% in any 12 month period. Reduce the time period to 6 months or less when the GDP is negative.

(6) Jail all Ponzi schemers.

(7) Immediately confiscate assets of all Ponzi schemers and their associate schemers and compensate those who were taken in by the schemers with all available proceeds from the confiscation.

(8) Investigate the SEC and get rid of the deadwood.

Jan 31 07:20 AM

[sunshine 21:]

Some of us are are in the enviable of having our mortgage paid off, our cars (3) paid off, NO credit card debt and thru smart investing and savings an enviable middle class exisistence without needing to work. Although we both still do work and make a very good income at that. What we don't do is shop for recreation on the weekends. Shopping has become a recreational pursuit for most Americans. "What do we do this weekend?" "Let's go to the mall, I need a ........" And you come home with more than you needed. We ski, hike, bike, camp, boat, garden, read, entertain(pot luck is the norm in our community) among many other things. The last thing I want to do is go shopping. I save it up for 2 or 3 trips a year and the rest is local groceries. But I recently scored a diamond bracelet at 60% off and a new Tag Heurer diamond watch at 50% off due to the recent economic downturn and I could pay cash for that. So there will be some great deals for those of us who didn't do stupid things with our money to begin with.

Feb 02 10:12 AM

[billddrummer:]

Deadmalls.com is waaay out of date. It missed Sharper Image, Linens & Things, Circuit City, Ritz Camera, Mervyn's, KB Toys, Tweeter, Mattress Discounters, Levitz, CompUSA, Sam Goody's, Bombay Co., Shoe Pavilion, etc.--and these are just the chains with lots of stores. When the most recent news story is about Montgomery Ward (remember them?) you have a stale site.






On Jan 20 11:58 AM smiley1 wrote:

> Tazman, I like the way you think and I hope you are right. However,
> since I am in the CRE industry my prediction is that a number of
> marginal malls will die on the vine. The first domino is the loss
> of one or more anchor stores. In my neighborhood that's Dillard's,
> Macy's, Belk and a few others. Dillard's has been and will continue
> to close stores. If a mall loses 2 of its 3 anchor stores in this
> environment it will certainly die a slow, slow death, as the smaller
> stores can't survive on their own over the long term. Check out deadmalls.com
> and watch the list of 'dead malls' grow in 2009 and 2010. While I
> hope to goodness I'm wrong, I doubt it...particularly after reading
> this very sobering article. Happy shopping!
>
> On Jan 20 11:24 AM tazman wrote:

Mar 06 07:10 PM