The pain of the recession is lingering at U.S. shopping centers, and the sting is worst in the once-booming Western states of California, Arizona and Nevada.
Even as the national economy gains traction and there are signs that some consumers are more willing to spend, retail vacancy rates keep rising partly because unemployment remains high at 9.7 percent, and also because stores are having financing difficulties. The challenges are most serious in Western states that were fast-growing before the downturn and fell just as quickly.
“In the Western region, if you were a commercial developer following the rooftops in a new housing area, you are going to have an issue,” said David Solomon, president and chief executive officer of NAI Global’s ReStore retail real estate division. “They built the houses and then the malls, but [the buyers] didn’t come. Now there’s nothing to support those retail properties.”
Tight credit, along with falling retail rents and property values, mean investors and developers are having a hard time refinancing loans. The foreclosures that ravaged residential real estate in 2008 and 2009 are likely to take a toll this year on the commercial real estate market, including retail, analysts said.
Hardest hit may be newer properties and mid- to lower-tier malls that don’t command marquee tenants. Mall owners lowered rents about 3.6 percent last year, real estate research firm Reis Inc. said. In 2009, strip malls, neighborhood centers and regional malls were losing stores at the fastest pace in more than a decade.
Retail vacancies in the first quarter of this year rose to their highest level in at least 10 years, despite lower rents intended to lure tenants, according to Reis. Vacancies at the biggest malls increased to 8.9 percent in the first quarter from 8.8 percent in the previous three months and 7.9 percent a year ago. Vacancies at smaller neighborhood and community centers rose to 10.8 percent, the highest percentage since 1991.
Asking rents at regional and super-regional malls in the first quarter dropped to $38.79 a square foot, down 3 percent from a year ago and 0.6 percent from the fourth quarter of 2009, the sixth consecutive quarterly decline, Reis said. Strip center rates were at $16.62, a 3.4 percent drop from the first quarter lastyear, marking a decline of seven quarters in a row.
“It’s a better deal for retailers to look to the A malls in this weak market, and in some cases move from the B to the A malls if the rents are in the same range,” said Michael Niemira, chief economist for the International Council of Shopping Centers. “The numbers of store closings seem to be moderating, but you still need store expansion to bring down the vacancy rates and fill the available spaces, and it will be some time before an expansion cycle begins. We will continue to see landlords discount their rents just to fill the space.”
Although comparable-store sales in March were the highest increases of the decade against weak year-ago comparisons, and February comps were strong, even mall operators and developers with top properties are suffering. Among them are:
• Bankrupt General Growth Properties Inc.’s Elk Grove Promenade, a partly built 1.1 million-square-foot project outside Sacramento, Calif., which was to house a Macy’s and Barnes & Noble, is dormant and GGP is trying to sell it.
• Lenders for the 144-acre CityNorth mixed-use development in suburban Phoenix moved to foreclose this year after the developers, Related Cos. and Thomas J. Klutznick Co., defaulted on a $290 million loan. Nordstrom and Bloomingdale’s pulled out last year.
• Triple Five Development shelved its planned $750 million Great Mall of Las Vegas after defaulting last year on a $27.6 million loan for the still-vacant land. Village Square Shopping Center, a 238,000-square-foot retail center on Sahara Avenue in Las Vegas, went into receivership in December.
• The Shops at Anaheim Gardenwalk, which opened in 2008, was put up for sale last month after owners Excel Realty defaulted on a $210 million loan.
• Phoenix-based Opus West, the owner and developer of the Shoppes at Chino Hills and The Commons at Chino Hills in Corona, Calif., filed for bankruptcy in July. The properties are in foreclosure and The Shoppes at Chino Hills was put up for sale in March by the bank consortium that took over ownership. The development has a vacancy rate of about 15 percent. Tenants include Banana Republic, Buckle, Forever 21, H&M, Hollister, Victoria’s Secret and Barnes & Noble.
“Declining real estate values and tight credit markets continue to impede the refinancing of assets and restructuring of lending agreements,” Mark Rauenhorst, former ceo of Opus Group, said at the time of the filing.
• Bel Mare, a high-end shopping center planned for a 2.5-acre beachside parcel in wealthy Newport Beach, Calif., was scaled back 35 percent and then abandoned by landowner Allied Retail Partners. The land was divided and sold to two local buyers in March.
“I don’t know what the future of malls looks like,” Glen Senk, ceo of Urban Outfitters Inc. said in January at the ICR Xchange Conference in Dana Point, Calif. “There is way too much selling space and malls are comprised of a lot of sick brands.”
Rising commercial — both retail and office — vacancy rates and declining rents are weakening cash flow, and loan defaults have increased. The share of commercial mortgage-backed loans at least 30 days past due rose to 4.1 percent in 2009, compared with 1.2 percent in 2008, the largest increase since 1997, according to the Mortgage Bankers Association.
“We will see increasing vacancy rates for the next 12 months, and that applies to all commercial real estate,” said Christopher Bonbright, ceo of Ramsey Shilling Commercial Real Estate Services in Los Angeles. “It will be the noncredit [worthy] without the means or ability to weather the storm that will go down, as well as retailers who saw business drop sharply owing to the recession.”
Las Vegas and Phoenix are among the markets with the highest retail vacancies in the nation. The first-quarter rate for neighborhood and community shopping centers was 12.9 percent in Las Vegas, a 3.2 percent rise versus the same period last year. Phoenix posted an 11.7 percent rate in the same period, a 2.9 percent increase over the previous year.
California has traditionally posted retail vacancy rates lower than the national average, but the state’s numbers are up, hitting 7.4 percent at the end of last year, versus 5.7 percent in 2008. Retail vacancies in the Los Angeles metropolitan area rose to 5.8 percent at the close of 2009, compared with 4.3 percent the previous year. The Inland Empire region, which stretches east of Los Angeles and is the third most populous area in California, posted an 11.6 percent rate at the end of the third quarter compared with 7.6 percent in the same period in 2008.
The liquidations of key anchor chains, such as Mervyns and Circuit City, continue to punish smaller tenants.
Because commercial loans are typically made on a shorter term and are rolled over at the end of the term into a new loan, some markets will likely see a rash of commercial foreclosures, with financial institutions unwilling or unable to roll loans over and hesitant to rewrite them at lower rates, experts said.
“It’s going to get worse before it gets better, especially in markets like the Inland Empire, where unemployment is high and for which there’s not likely to be a residential comeback anytime soon,” Bonbright said.
Reis Inc. researchers forecast that unemployment and unstable consumer spending will burden retail properties for at least the next year and a half, with rents expected to continue falling and vacancy rates at neighborhood and community centers rising through 2011.
“You’re seeing an increasing divide in malls between the have and the have-nots,” said Terry Burman, ceo of Signet Jewelers Ltd., which operates about 2,000 stores in the U.S., including Kay Jewelers and Jared The Galleria of Jewelry. “Those malls that are reinventing the concept, allocating space for entertainment, being innovative about food and attaching lifestyle elements are more viable than the aging properties that are slowly, or in some cases quickly, eroding. The better properties are reinvesting and simply maintaining foot traffic better. That’s where you want to be.”
Most national retailers opening stores are doing so in top shopping centers in major markets, including New York, Miami, Chicago and Los Angeles. The big box and small retailers that are willing to take a risk in secondary locations will do so only at significantly lower rents.
“In a recession, rents at A malls become B-level rents, so as a retailer, why would you pay the same rent for a lesser mall when you could be in the better one?” Bonbright said.
Experts estimate commercial property values in Western markets such as Las Vegas have fallen 30 to 40 percent from their peak in 2007.
“There’s definitely a big [divide] between the B-plus or A mall and the B-minus and below,” said Alexander Goldfarb, associate director of research at Sandler O’Neill & Partners in New York. “For the most part, A malls are in OK shape. Now the real question moving forward is, ‘Will retailers ever go back to the B and below malls or will they stick with the B+ and A properties because they are proven?’”
Leading malls aren’t immune to tenant flight. Calvin Klein, Dior, Just Cavalli and Lucky Brand Jeans have closed in recent months at Taubman-owned Beverly Center in Los Angeles, which has about 160 specialty boutiques and restaurants.
The Americana at Brand in Glendale, Calif., which opened in 2008 and features more than 75 shops, has seen the exit of Abercrombie’s shuttered Ruehl concept; the bankrupt Russian teen label Kira Plastinina; the Australian loungewear brand Peter Alexander that departed the U.S. market; Lucky Kids, and Aveda.
In an effort to maintain tenant stability and keep properties attractive to retailers looking to move up, mall operators with cash are reinvesting in their properties.
Churchill Management Group, which owns the luxury Shops at El Paseo outside Palm Springs, Calif., just completed a $12 million renovation. The center is fully leased, and Escada has signed on for a space now occupied by BCBG that will open up in two years.
“These days there has to be more going for you than just the market, like good co-tenancy, and a great physical value-added property,” said Hanna Streuver, who handles leasing for the center. “Tenants are being very picky about where they stay, and they can be….People want to be making money from Day One, and to do that they need reasonable occupancy expense.”
For all the turmoil, brokers and analysts see eventual stability.
“Most who’ve hung on can pull out of this, but only if they’ve adjusted their business model,” Bonbright said. “It’s near the end of the cycle, so hopefully there will be a steady increase in consumer spending to stabilize things after this passes.”
@zacposen's go-to holiday gift? Cookies! "I'll usually bake cookies and send them as a gift," said the designer, who recently released his cookbook "Cooking With Zac: Recipes from Rustic to Refined." Get the recipe for his Brown Butter-Chocolate Chip Cookies via link in bio 🍪🍪🍪 #wwdeye #cookingwithzac
For @monsemaison’s pre-fall 2018 collection, Fernando Garcia and Laura Kim honed in on the brand’s many signatures — men’s wear, which was tweaked and feminized through deconstruction, proportion play and lots of bare shoulders. See the rest of the photos on WWD.com #wwdfashion (📷: George Chinese)
On Friday night, @yohjiyamamotoofficial received the Design for Asia Lifetime Achievement Award in Hong Kong. The 75-year-old designer has been celebrated for many years and is best known for his dark and avant-garde tailoring. “In my long career, in design, architecture, [I’ve been to] so many parties, this is the very first time that I have such a warm feeling, I really appreciate this,” Yamamoto said. #wwdfashion (📷: @dominiquemaitre)
Discovery is collaborating with British pop artist @philipcolbert on a new line of clothing and accessories called Discovery Shark. The collection, which will launch next summer for Shark Week’s 30th anniversary, features a whimsical line of women’s and men’s bomber jackets, sweatshirts, bags and more. #wwdfashion
“I’m always a big champion of a female rapper, and I’m glad to see a new voice that feels unique and authentic that’s coming up, and I think we’re going to see more great things from her,” said @itsjeremyscott about @iamcardib, who performed at @moschino’s Art Basel Miami Beach party last night. #wwdeye (📷: @lexieblacklock)
@janellemonae’s “What’s Your Frequency?” room in @refinery29's #29Rooms made its debut this week at the opening of the Los Angeles art exhibit. “It’s about the ongoing conversation around mass surveillance, the weaponization of technology and cultural uniformity. My space was created so that we can come together and talk about the complexities of our humanity,” said Monáe. #wwdeye (📷: @bucknerphoto)
@pantone announced their Color of the Year 2018: Ultra Violet. Nearly 20 months after the musician Prince’s death, fashion is having a purple moment. Varying shades of purple appeared on spring or fall runways, from @christopherkane to @calvinklein. @gucci’s Alessandro Michele bathed his fall runway in ultra violet-colored light at one point. Pantone 18-3838 is meant to “push the boundaries of what inspires us to look upward and outward to the future.” #wwdnews #wwdfashion (📷: @kukukuba)