Open Air Shopping Malls First to Feel Pain of Recession

by: Research Recap

As concern over commercial mortgage backed securities (CMBS) rises, Moody’s has issued a report identifying the characteristics of malls and open air retail centers that increase or reduce the risk of their failure during the current economic recession.

In a new report, titled Retail Property Type Differentiation in a Down Economy, Moody’s notes that lower risk factors for regional malls include being the dominant mall within a trade area, being in a strong trade area marked by above average population and income growth, and producing in-line comparable store sales of greater than $450 per square foot at an acceptable occupancy cost to sales ratio.

High-risk factors for regional malls include an anchor alignment with three or less department stores, department stores whose sales productivity are lower than their chain-wide averages, low in-line comparable store sales and a high occupancy cost to sales ratio.

For open-air centers, some factors that lower risk are having grocery stores that are ranked #1 or #2 in their market as anchors, good visibility, and strong in-fill locations. High risk factors include being a newly built center developed in anticipation of the housing boom.

Much of the retail development over the recent past has occurred within the open air segment, most of which was driven by the housing boom as retail development typically “follows the roof tops”. Lifestyle centers, often anchored by an array of fashion-oriented retailers, home-oriented shops, or restaurant and entertainment tenants, draw in crowds during economic boom times, but often are the first to feel the pain of a recession.

Of note are Moody’s higher risk factors for open air centers:

  • Unanchored shopping centers.
  • Grocery anchored centers with weak supermarket operators or operators who compete head on with a Wal-Mart (NYSE:WMT) supercenter or Costco (NASDAQ:COST).
  • Lifestyle centers with a significant tenant concentration targeting discretionary consumer spending (ie. restaurants, apparel).
  • Newly built centers which were developed in anticipation of the housing boom.
  • Significant component of tenancy subject to co-tenancy and kick-out clauses.
  • Centers with material exposure to the following tenants: Linen’s ‘N Things (LIN-OLD), Circuit City, Bally Total Fitness, Goody’s Clothing (GDYS), Filene’s Basement, Blockbuster (BBI), Hollywood Video, Loehmann’s, Levitz, Michael’s (MIKL), Burlington Coat Factory, Rite Aid (NYSE:RAD), Guitar Center (GTRC) and Sports Authority (TSA).
  • Weak sponsorship.