Dismal Outlook for Mall Owners
By LIAM DENNING
If you thought shopping malls were a nightmare in the run-up to the holidays, just try owning one now that there is nothing left to do but take down the tinsel.
As retailers count their takings, it is becoming clear that consumers took a holiday away from retail land. And broad trends, such as free-falling house prices and rising unemployment, point to a dismal 2009 for anyone in the business of flogging stuff on shelves.
The same goes for the companies that rent them floor space. Real-estate investment trusts operating U.S. malls are especially exposed. Tighter credit has turned the screws on a sector with almost $23 billion of debt maturing over the next two years, according to real-estate consultancy Green Street Advisors, and an aggregate market value of just $17 billion. No wonder that, on average, mall REIT stocks look set to close 2008 down almost 60%.
Yet, as so often with equities that have taken a drubbing, some have enjoyed spectacular bounces recently. Glimcher Realty Trust units have jumped by 250% since its November low, when it dipped below $1 a share. CBL & Associates' stock is up 150% since Dec. 1.
There are three reasons this looks premature. First is the National Association of Realtors' gloomy outlook. It expects the vacancy rate for the retail property sector to hit 12.7% by the third quarter of 2009, up from 9.8% a year earlier. Average rents, having dropped 2% in 2008, are expected to fall 7.3% next year. No sign of a second-half bounce-back there.
If the NAR's prognosis sets the weak overall tone, the retail sector itself could provide next year's nasty surprises. Some retailers, such as Circuit City Stores, have sought protection from creditors already. Credit markets are indicating severe distress at several others.
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Associated PressGreen Street identifies three suffering firms -- Sears Holdings, Bon-Ton Stores and Dillard's -- that are also important "anchor" retailers for many malls. Bon-Ton's 10 1/4% bonds maturing in 2014, for example, offer an eye-watering spread of more than 93 percentage points over Treasurys. Even if these retailers do make it through the slump, they might have to restructure, perhaps closing some stores on the way, in order to do so.
Losing an anchor store is bad news for any mall, particularly lower-quality ones, where the closure can touch off a spiral of attracting fewer shoppers, leading to more closures. Green Street identifies Glimcher as having the highest exposure of the mall REITs to Bon-Ton, while it says CBL takes the top spot for both Dillard's and Sears.
The final issue is that mall transactions have dried up, meaning more guesswork than usual going into calculating the REITs' net asset valuations. Apart from economic headwinds, investors with mall REITs in their portfolios run up against the basic problem of having to manage what they can't adequately measure.
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