Bleak holiday sales cause problems on mall owners

The grim holiday season shopping may cause huge problems for some retailers and could take down some US malls fighting rising vacancies, softening rents and their own debt loads.

"This is probably going to go down as the worst season in history as far as retail sales," said Victor Calanog, director of research for real estate research firm Reis Inc. "The difficulty of ascertaining what the effect would be at the property level is because we're already heading toward a train wreck."

The International Council of Shopping Centers predicted on late October that national chains would announce 6,100 stores going down in 2008 and 3,100 in the first half of 2009. That was even before stores like Circuit City and KB Toys filed fro bankruptcy.

But for those nonchain stores and those classified as retail, the ICSC predicted 148,000 of them would close in 2008 and 73,000 would follow in the first half of 2009.

Even amidst a holiday season wherein retail chains are considered bankable mall tenants, apparel sales dropped 19.7 percent, according to SpendingPulse, which follows holiday sales. Appliance and electronics sales dropped 26.7 percent and luxury goods plunged 34.5 percent.

Calanog said that it is a general rule that a mall can only survive if 30 to 40 percent of its tenants remain in business. But the percentage will have to be a little higher to maintain those malls that are struggling with debt like the General Growth Properties Inc, the No.2 US mall owner.

LEVERAGE

"The leverage is what's going to kill them," said Bret Wilkerson, chief executive of Property & Portfolio Research. It means that some malls will be struggling with less income while facing harsh debt costs.

"You've got pressure from both sides here," Calanog said.

Reis predict that the fourth-quarter mall vacancy rate could top 7 percent, the highest since they started tracking regional mall performance in the start of 2000. It sees fourth-quarter mall rents dropping by 0.1 to 0.4 percent.
According to Property and Portfolio Research, all retail properties not only large malls would see their rents drop by an average of 3.5 percent in 2008.

The research firm tracks “economic vacancy”, the amount of retail space that exceeds the amount that sales can support. Economic vacancy now stands at about 13.5 percent and is expected to peak at 17.3 percent in the third quarter of 2009, "implying that one out of every six square feet needs to just go away," Wilkerson said.