Three major real estate companies specializing in retail showed signs of serious wear Monday as the weakened economy and the credit squeeze have made it much harder to refinance debt and close major deals.
General Growth Properties Inc. and Centro Retail Trust were each in negotiations with their banks to try to extend expired loan agreements, and Developers Diversified Realty said an October deal to sell 5.9 million square feet of real estate and raise more than $260 million would not close this month as planned.
For stores, financial difficulties among landlords could mean slower services and the delay of renovations and other projects. It might also result in lower rents as retailers gain leverage.
“It’s absolutely essential for the landlords right now to do whatever they can to keep their tenants,” said Matt Cichocki, a real estate broker and principal at NAI Realvest. “The minute they start losing their tenants, particularly their anchors, the whole house of cards is going to start tumbling on them.”
Real estate companies already have been among those hardest hit in the downturn.
On Monday, investors pushed down Developers Diversified’s stock by 17.4 percent to $4.70. Shareholders bet that General Growth would find some kind of solution to its credit crunch and boosted the firm’s stock by 2.8 percent to $1.85. The Standard & Poor’s Retail Index fell 2 percent, or 5.44 points, to 270.98 as the Dow Jones Industrial Average slid a milder 0.8 percent, or 65.15 points, to 8,564.53.
Problems among developers could eventually spread.
“Everybody’s feeling the pinch,” said David Bassuk, managing director in the retail practice at AlixPartners LLP.
The holiday season is turning out to be the worst in decades and many retailers, in addition to slowing expansion or closing unproductive stores, are trying to conserve cash by pushing back payments to their landlords as well as vendors.
“If the retailers put the pinch on the landlords and people who own their space, it’s going to come back to hurt them in the end when those shopping centers and malls begin to default,” Bassuk said. “This is a cycle that’s going to come back and hurt everybody.”
Continuing trouble at giants such as General Growth might also make the banks take a second look at their retail clients. The banks are closely examining developers’ cash flows and can determine which tenants have been paying rent on time as well as those who haven’t paid in a timely way. Those banks also serve as factors for retailers, guaranteeing to vendors that the goods shipped will be paid for.
“It is five or six major banks or financial institutions who are very interwoven throughout the retail world,” Bassuk said. “They would know exactly who is paying and who is not. If it starts going down and players start struggling and facing bankruptcy, the financial institutions are going to feel the pain and tighten the screws on everyone.”
For now, some mall owners are simply fighting for survival.
Chicago-based General Growth, which had already received a two-week extension on $900 million in debt, continued to negotiate with its bankers after the deadline passed on Friday. “The company is continuing its discussions with lenders regarding its loans,” the firm said Monday. A default on the mortgages for the Fashion Show and Palazzo properties in Las Vegas could push the developer, which has a portfolio of more than 200 malls, into bankruptcy.
In Australia, Centro Retail Trust on Monday requested that trading in its shares be halted “pending announcement regarding the outcome of negotiations on the extension of the Centro Properties Group finance facilities that are due to expire today.” As of June, the firm had 665 properties in the U.S., worth $12.8 billion.
And Cleveland-based Developers Diversified planned to create a joint venture with another investor and sell it 13 assets for a total of $890 million, but said the deal would not close this month.
Retailers might find they just have to live with the malls they have.
“The lending environment has become so difficult, the banks and the traditional lenders just aren’t lending money to build new space,” said Alan Shor, president and co-founder of The Retail Connection. “The retail industry is going to contract. It’s a sign of overbuilding, too much retail.”
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