Problems with mortgage-backed securities ultimately led General Growth Properties Inc. into last week’s bankruptcy filing, but there may be repercussions beyond basic asset sales and cost cuts for other real estate investment trusts and their tenants.
“It casts a dark cloud over all the REITs that are out there, but one should not draw any hasty conclusion that others will follow. The General Growth filing was inevitable….They had a big expansion spurt a few years ago and leveraged everything. They grew a little too big too fast,” said Anthony Sabino, a professor of law and business at St. John’s University.
Sabino suggested the more immediate concern is whether General Growth can maintain the same level of upkeep at its 200 mall sites, given the likelihood of staff cuts as the mall owner becomes a leaner operation.
“The size of the mall doesn’t decrease, but maybe maintenance staff will get cut, and then the mall is not as clean as before. Consumers stay away and the retail tenants lose traffic. That’s when the landlord’s financial trouble is visited on its tenants,” Sabino said.
He said tenants negotiating renewal leases with General Growth should carefully monitor the ongoing level of service the developer provides.
As for other REITs, retail tenants should look at when their mortgages come due to gauge for potential risks down the road.
“Tenants will look to see what other [mall owners] can do for them but may find that it costs more for the same level of service, and therefore rents are going up and not down. The various concessions, such as a month of free rent, may go away. Landlords and tenants need each other, and they either sink or swim together. There will be some concessions and some tough bargaining on both sides,” Sabino said.
“The challenge will be how prepared one is and how strong is one’s balance sheet. All REITs will have to examine their credit structure and see how liquid they are or can get,” said Andrew Moser, co-founder of Kairos Capital Partners.
Moser expects buying opportunities for firms that have the liquidity to add value to their real estate portfolios.
“There’s a lot of cash out there. Most investors are sitting on a lot of cash. The concern is where do they deploy that cash. I don’t think we’ve hit the bottom of anything yet. And those with liquidity won’t wait and sit until the very end. They’ll strike when [the right] opportunity crosses their way,” Moser said.
That could result in a transfer of wealth as possible choice assets get sold in the General Growth bankruptcy.
Moser also said retailers are likely to push for rent reductions due to the economic backdrop but may find that mall owners at “A” malls aren’t in a rent-reduction mode. “Those centers have a long list of retailers waiting to go into the centers when there is a vacancy. In the top locations, landlords would rather have the keys and space back to rent to someone else,” he said.
At a recent Retail Marketing Society presentation, Nicholas King, chief operating officer and executive vice president of Prime Retail, said mall operators can often get better pricing when weaker tenants give up their spaces, which were frequently leased at below-market rents.