NY Times: A Squeeze on Retailers Leaves Holes At Malls
By TERRY PRISTIN
It was planned when the local real estate market was very hot, and now the Crossroads of Cresthill, a modest-size strip mall of 44,000 square feet in the Chicago suburbs, is almost completed. But the developer, Gierzyck Midwest, has managed to nail down only a couple of small tenants. The 10,000-square-foot anchor it hoped to land, Menards, a hardware retailer, was lost to another shopping center a mile away.
So Gierzyck is offering prospective tenants something that may become more common in future months: free rent. And not just while the store is being fitted out but even after it opens, said Dan Tiberi, a senior associate at Gierzyck. It s our way to get more people to look at our center, he said. With the market taking a turn for the worse, we decided to address the problem.
In larger shopping malls, operators have not yet had to resort to giving away their space to attract tenants, but most landlords are facing mounting challenges these days. Vacancies are up, retail sales have been disappointing, and long established chains like Mervyn s, Linens n Things, Boscov’s and the Sharper Image have filed for bankruptcy protection, raising the specter of more dark spaces with fewer potential tenants to replace them.
Some 6,500 chain stores are expected to close this year, the largest number since 2001, according to the International Council of Shopping Centers, a trade group. When stores close, neighboring stores may be entitled to exit or to have their rent lowered.
Retailers like the Gap are not only curtailing their expansion plans but are also trying to squeeze their stores into smaller spaces to reduce rental costs. The popular Cheesecake Factory restaurant chain is experimenting with a smaller prototype. American Eagle is asking landlords in poorly performing shopping centers for rent reductions.
Retailers are making an enormous effort to focus on the bottom 10 percent of their portfolios, said Michael S. Wiener, the chief executive of Excess Space Retail Services, a company based in Lake Success, N.Y., that helps tenants shed excess space or restructure their leases. He said his business was up by 50 percent this year. About half the vacated spaces are likely to be subleased, but many empty boxes in second-tier markets may not be desirable for years to come, he said.
For strip malls, the vacancy rate is 8.2 percent, the highest since 1995, and the average asking rent declined by 0.4 percent from the first quarter of the year to the second quarter the first drop this decade, said Sam Chandan, the chief economist for Reis Inc., a New York research company that tracks the top 76 metropolitan areas.
The vacancy rate for regional malls is 6.3 percent, the highest since 2002. Though mall rents rose by 0.2 percent from the first quarter to the second, all retail rents are down when inflation is taken into account, Mr. Chandan said. New centers that opened in the first half of this year were just 62.8 percent occupied, on average, compared with 72.1 percent for those that opened last year, he said.
With all the problems in retail real estate, the default rate remains low for loans issued to mall owners that were packaged with other mortgages and sold to investors as commercial mortgage-backed securities.
Realpoint, a credit rating agency in Horsham, Pa., has tracked 127 mall loans that are delinquent or in default, including a $22.2 million mortgage on Midway Mall in the Dallas suburb of Sherman, Tex. Like many older malls, Midway, which is managed by Simon Property Group, the largest operator in the country, was unable to withstand competition from a nearby new open-air center, Sherman Town Center, and is nearly half vacant.
In the face of a prolonged housing crisis, the decline in consumer spending, and the lack of construction financing, developers have been forced to abandon, postpone or scale back projects.
Don Chapman, a managing director at Ariel Preferred Retail Group of Williamsburg, Va., which owns seven outlet centers across the country, began lining up tenants a year ago for a $90 million outlet center he plans to build in Rockford, Ill., but is finding that lenders are insisting on onerous terms, including more equity as well as personal guarantees from the developer. Our thinking was that we would be in the ground by now, said Mr. Chapman, who plans to continue seeking tenants. It s taking longer than we anticipated.
Brian M. Smith, the chief investment officer for Regency Centers, a national strip mall developer and operator based in Jacksonville, Fla., said the company revised its development strategy in the spring of 2007. We saw it coming, Mr. Smith said. We dropped $400 million worth of projects and totally revamped our pipeline.
Regency shelved plans to build shopping centers in areas where new housing developments had stalled. Instead, the company focused on affluent areas where land costs and strict zoning regulations limit competition, he said. A broker who represents national retailers, Walter T. Wahlfeldt, a senior vice president at Jones Lang LaSalle, said tenants had begun exercising their right to back out of their leases when the developer has been unable to secure an anchor tenant. The consequences of the economic downturn vary from region to region. Las Vegas and Orange County, Calif., are suffering from problems related to the subprime debacle, but retail vacancies remain low because these markets were so strong to begin with, said Hessam Nadji, a managing director at Marcus & Millichap, a national real investment brokerage based in Encino, Calif. Mr. Nadji said he expected those markets to deteriorate, while San Francisco, San Jose and San Diego were likely to remain healthy.
But all retail sectors are losing business, including the newer open-air centers that cater to well-heeled shoppers, known in the industry as lifestyle centers. The difference with this downturn is that it s affected all forms of discretionary retail spending, said Malachy Kavanagh, a spokesman for the shopping center trade group.
Paul Morgan, an analyst at Friedman, Billings, Ramsey & Company who specializes in real estate investment trusts, said the lifestyle sector became overheated in recent years as developers rushed to build them. There will be a significant correction, except for the very good ones, he said.
And shopping centers that are limited to large and medium-size stores a Home Depot, say, with an Office Depot and a Circuit City may have bigger challenges than grocery-anchored strip malls with smaller stores, said Nicholas K. Vedder, an analyst at Green Street Advisors of Newport Beach, Calif. One vacancy has more of an economic impact, he said. It might be difficult to find someone to fill that space.
Steven B. Greenberg, the president of the Greenberg Group, a company in Hewlett, N.Y., that represents national retailers, said that some of his clients were getting rent discounts of as much as 20 percent in some top malls.
Tenants fall into two groups, Mr. Greenberg said. One group is hiding under a rock waiting for things to settle down because sales are not good. The other group sees an opportunity to strike better deals and get real estate that was not available before.