Foreclosure at the Mall: General Growth Files for Chapter 11

April 16, 2009 — -- Forget those 50 percent off signs. A trip to your local mall these days might reveal a new sign in the window of your favorite retailer: "Going Out of Business."

That means big trouble for mall owners already struggling to survive.

As individual store owners struggle to stay afloat, mall operators facing ever-mounting debt are fighting a similar battle.

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General Growth Properties Inc., the nation's second-largest mall operator, filed for Chapter 11 bankruptcy protection today, the latest sign of the challenges facing malls of all sizes.

The nation's shopping center owners are facing a recessionary double-whammy: Consumers who are spending less and real estate investors who are holding back money used to finance their operations.

Those forces are now colliding, causing major problems for some mall owners into bankruptcy. Don't expect your local mall to necessarily close its doors -- although some of the 3,500 malls across the country, mostly smaller malls, might -- but it could very likely be owned by somebody else shortly.

"They have significant problems by and large," said George Whalin, president and CEO of Retail Management Consultants.

Retailers may close 73,000 stores in the first half of 2009, according to the shopping center council, robbing malls of the vital rental fees that allow them to pay off their debts and stay in business.

"General Growth bankruptcy is the beginning of the commercial real estate crisis. It's one of the two big ticking time bombs that has not been reported well in the financial circles yet," said Burt Flickinger, a consumer industry analyst for SRG Insights. "We in the beginning of a record number of retail bankruptcies and a record number of shopping center and shopping mall bankruptcies."

Big chains, including Linens 'N Things, Circuit City, Whitehall Jewelers, Mervyn's and Steve and Barry's have already filed for bankruptcy. Other big retailers, including Talbots, Fashion Bug, Ann Taylor, J. Crew and Liz Claiborne have either announced store closings or scaled back or delayed expansion plans.

Whalin said, "There are going to be a significant number of retailers that will go bankrupt. There's no doubt about that. … We've just never seen anything as bad as this."

General Growth Bankruptcy

General Growth's bankruptcy had been expected for several months. The mall company tried for months to convince its lenders to give it more time to refinance billions of dollars in debt. Today that clock finally ran out.

Most malls are owned through large real estate investment trusts or Reit's. The two biggest are Simon Property Group and General Growth Properties.

In 2004, Chicago-based General Growth spent $12 billion to acquire competitor mall owner Rouse. The deal included assuming $5.4 billion in Rouse debt. The company has racked up billions more in debt from building new malls, renovating old ones and other business expenses.

As credit markets froze over the past year it left General Growth -- which owns more than 200 shopping centers in 44 states -- with roughly $27 billion in debt and no way to refinance. Its assets as of Dec. 31 were valued at about $29.6 billion, according to documents filed with the U.S. Bankruptcy Court in the Southern District of New York.

In order to climb out of bankruptcy, General Growth is expected to sell many of its properties. Since October it has been trying to sell its marquee retail properties in Las Vegas, which include the Fashion Show Mall, Grand Canal Shoppes at the Venetian, and the Shoppes at the Palazzo.

"Those owners that took on too much debt have ultimately paid the price," said Michael P. Niemira, chief economist at the International Council of Shopping Centers.

Last spring, General Growth's stock traded as high as $44.23. Today it is worth pennies.

The company said shoppers at its malls will not be affected by its decision to file for bankruptcy protection.

"Our restructuring will be invisible to the customers who visit our properties every day," President and Chief Operating Officer Thomas H. Nolan Jr. said during a morning conference call.

Malls Battered by Recession

Niemira said the industry has "really been battered by every part" of this recession.

First, housing stores saw problems. Then apparel. Now every store, including the once-immune luxury retailers.

"Clearly, there are lots of problems in the retail industry, and they range from the weakness in consumer demand to the debt issues that some companies are facing," Niemira said.

This year was "the weakest holiday season since at least 1970," Niemira said.

He said stores are doing everything from slashing prices to laying off workers to try to stay afloat. Retailers, he said, account for 9 percent of the nation's jobs but represent 25 percent of the recent employment declines.

As mall owners try to refinance existing loans, they find themselves struggling to get investors to give them money and -- like many homeowners -- they find their real estate is worth less than it was just a few years ago.

Macy's-May Deal the First Big Blow

Whalin said the first major blow to malls came in August 2005, when Macy's bought out rival May Department Stores. In one giant move, retailers, such as Marshall Field's, Filene's, Hecht's, Foley's, Robinsons-May and Kaufmann's all fell under the Macy's flag.

A mall that once had Macy's anchoring one end and Filene's at the other suddenly had two Macy's. The company quickly moved to close its redundant stores, and the malls lost large tenants.

"The value of their real estate has diminished for a variety of reasons, certainly not the least of which was Macy's gobbling all the regional department stores and essentially closing some of those stores and struggling with others," Whalin said.

But it's not just big chains that are shutting their doors as we fall deeper into a recession.

At the beginning of 2006, just 7.3 percent of retail spaces -- from malls to strip malls to stand-alone stores -- were empty, according to the National Association of Realtors. That figure now hovers just below 10 percent, and for next year the group forecasts a 12.4 percent vacancy rate.

And after a disappointing Christmas shopping season, those numbers could climb ever higher.

The amount of money spent at the nation's retailers from Nov. 1 through Christmas Eve was down 5.5 percent to 8 percent compared with last year, according to MasterCard SpendingPulse, which tracks retail sales for all forms of payment, including check, cash and credit card.

Falling Rents

Lawrence Yun, chief economist for the National Association of Realtors, anticipates a 7 percent drop this year in retail rents as a larger supply of vacant stores comes on the market.

"The property owners will be competing, trying to draw the tenants by offering much lower rents," Yun said. "A combination of a rising vacancy rate and falling rents will naturally mean that the property prices will be coming down."

Some big chains are already asking for leases to be renegotiated and others are likely to ask when their leases expire in the next year or two, Whalin added.

But don't expect the malls themselves to close. Both Whalin and Niemira said the properties are profitable; it's just that some mall owners have too much debt to ride out the recession.

"The regional mall is here to stay as part of the retail environment," Whalin said. "It isn't going to go away anytime soon."