Saturday, October 18, 2008

CNNMoney: Mall's Demise Could Doom Communities

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Part and parcel with our "Pooring of America" theme is the credit bubble has resulted in overbuilding of too much retail - in just about every niche. We're way overbuilt - we build for a steroid filled (credit) demand cycle. Unfortunately, as the U.S. has moved away from building things we've replaced those jobs with careers that end and begin in said stores. So as this retail shrinkage happens, it will have a much harder hit that it would on the economy of the 50s, 60s, 70s, or 80s when "consumerism" was not the end all and be all.

We've been tracking the growing litany of failures and I expect far more in the future.
  1. [Apr 11: This Day in Bankruptcies - Another Airline and our First Major Retailer]
  2. [Jul 10: Another Retailer (Canary in Coal Mine Down -Steve & Barry's]
  3. [Jul 21: Add Mervyn's to our Growing List of Retailers Headed to the Great Sunset]
  4. [Jul 30: Bennigan's, Stake & Ale Close - File for Bankruptcy Protection]
In fact after denying gravity for a while, our Ultrashort Real Estate (SRS) which shorts commercial REITs has taken off of late as people realize we have too much construction of everything and rents are going to take a major hit. We were just early in this call by buying in, in 2007. (note we cannot short individual names but I highlighted mall REITs as the target if I could - instead we use the ETF) The market was in denial [Oct 10: Now People Worry about Retail Stocks?] for a year before finally coming to the realization much of this growth the past decade was fraudulent. I will stress for every one large chain you read about in the paper that is relatively well capitalized and had economies of scale, you will not hear about the hundreds of "one offs" - mom and pop retail/restaurants establishments. Expect a lot of half empty strip malls by end of 2010.

CNNMoney.com is out with a story this week - the mainstream media is finally catching up to the curve. The difference is these stories still talk of cyclical closings; I believe many of these are structural - until we add population and real wealth (not fake wealth via increases in debt) we'll be at a lower level of "consumerism" for a long while.
  • With thousands of stores closing in the economic downturn, the increase in empty space at the nation's shopping malls is leaving a hole in the hearts of once-vibrant communities. In some cases, one-quarter or more of shopping centers are now empty, and the decline - or even the demise - of a mall can have a devastating economic and social impact.
  • When a mall closes, you have a significant loss of jobs, even though these are typically low-paying jobs," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.
  • Malls also provide significant tax revenue to communities through property tax (yet another nail in the coffin of states and cities tax revenue next year) Kotval said small towns are dependent upon this money to balance budget deficits, and to fund local services and infrastructure development.
One such example
  • In tough economic times, shortfalls arise - a scenario playing out in the village of North Randall in Cuyahoga County, Ohio. The Randall Park Mall has been a main source of revenue for North Randall, a suburb of Cleveland that has a population of about 1,000.
  • But a challenging economic and competitive climate has crippled business - and the 32-year-old shopping center, once the largest enclosed mall in the greater Cleveland area, is closing.
  • Besides jobs, he said the village's residents also depended on revenue from the mall to fund basic services such as security and free snow plowing for senior citizens. (now the money will come from? has to be higher taxes on residents at a time they can least afford it)
  • Now, the demise of the mall and sluggish patronage at the racetrack have almost put the village of North Randall on "deathwatch," Jones said. The situation is so bad that the village can no longer provide its own security for its residents. "The Cuyahoga County Sheriff's Office is patrolling North Randall," Jones said. (very similar stories in metro Detroit)
  • Unless the village figures out how to revitalize the 1.5 million square feet of mall space, Jones fears that North Randall "could become the first municipal fatality in North Ohio." "It could simply cease to exist as a city," he said.
  • Store vacancies at regional malls such as Randall Park are up 6.6%, which is the largest increase since early 2002, according to real estate research firm Reis. (and we haven't even officially started a recession, eh?) In some malls, store occupancy rates are falling below 75%, said Ivan Friedman, president & CEO of RCS Retail Real Estate Advisors.
  • One big obstacle to any type of large scale redevelopment in North Randall or anywhere else is the ongoing credit market lockdown. Industry experts said this could make it very hard for commercial real estate developers to borrow money for financing construction work.
  • RCS' Friedman said the credit freeze is also forcing regional mall operators who can't meet their debt obligations to put underperforming locations into receivership, which puts control of the property in the hands of its creditors. "Usually we see three or four (malls in receivership)," Friedman said. "I've already noticed eight or nine (malls) this year and I think it's the beginning of a trend."
  • PPR's Mulvee said malls are being hit hard from all angles. "More than 6,000 (locations of) national chains this year have announced closings, and 50% of those are in malls," she said.
  • "Second, there's no financing available for mall operators," she said. Several of the leading mall operators have significant debt that's coming up for renewal at the end of 2008 and early 2009.
  • General Growth Properties (GGP), the second-largest operator of malls, announced last month that it might sell some assets to raise capital for servicing its debt.
  • "If [mall] occupancy rates go down even further then it could get very frightening out there," Friedman said (it will be... it will be - watch 2009)
Long Ultrashort Real Estate in fund; no personal position


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