By  on April 17, 2009

Now that General Growth Properties Inc. has filed for Chapter 11 bankruptcy protection, the question is whether more recession-hit developers might follow.


Plummeting consumer spending has hit the profitability of many retailers. Circuit City, Linens-N-Things, Steve & Barry’s, The Sharper Image, Fortunoff and Mervyns filed for Chapter 11 protection and ultimately liquidated, shuttering hundreds of locations. Macy’s Inc., Foot Locker Inc., AnnTaylor Stores Corp. and Zale Corp. closed underperforming units that totaled into the hundreds. Meanwhile, Wal-Mart Stores Inc., Target Corp. and Gap Inc. have cut back or postponed planned expansion.

The result is that mall vacancy rates rose to 9.5 percent in the first quarter from the 8.9 percent registered for all of 2008, marking the largest single-quarter jump since 1999, according to Reis Inc., a real estate information company. With few, if any, new retail concepts in sight, shopping centers are loath to see retailers fail. That’s creating immense financial pressure on real estate investment trusts as centers lose tenants while those retailers remaining aggressively push for rent reductions.

Malls that wouldn’t have considered lowering rents 10 years ago are now struggling to keep their centers fully tenanted. The loss of rental income is taking a toll on the revenues of several REITs. General Growth Properties, the second-largest mall operator in the U.S., had been teetering on the verge of bankruptcy for months (for more on the filing, see sidebar). Simon Property Group on March 11 defaulted on payment of the principal of a loan for the Mall at the Source in Westbury, N.Y. Simon owns 25 percent of the property. Mills Corp. came close to seeking bankruptcy protection in 2007, when it almost defaulted on obligations on a $1.1 billion loan. Mills was bought out by Simon Property Group and Farallon Capital Management later that year. The Macerich Co. last month agreed to several refinancings on debt totaling $446 million.

There are some who believe the predominance of property owners has come to an end. “The balance of power has actually shifted from landlords to tenants as a direct result of the business climate,” said Naveen Jaggi, senior managing director of retail services at CBRE in Houston.

“Where we have a tenant that we believe is in extreme financial distress, we’re trying to work with them to come up with a mutually acceptable basis for maintaining their occupancy in the portfolio,” David Simon, Simon Property Group’s chief executive officer, admitted during the REIT’s year-end conference call on Jan. 30, 2009.

But the chief executive of a REIT who requested anonymity said the pressure is less on strong malls. “There is an increasing bifurcation of the good and not so good properties,” he said. “In challenged properties, where leases are coming up for renewal, landlords are dealing. In good properties, when leases are coming up, they’re sticking with the rents they want. The rents are holding steady. In a good mall, even if sales are down, rents will reflect future opportunities, not the business of the moment.”

Andy Grasier, co-president of DJM Retail, which provides lease-mitigation services to retailers, said mall owners are much more open to making deals, however. “Just a year ago, landlords weren’t being very responsive to rent reductions,” said Grasier. “Now it’s a different game entirely.”

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