Autopsy Of A Mall-ing

Regular readers will note that I've been talking about the commercial real estate bust for some time now. Hotels, motels, office buildings, business parks, big-box stores and retailers have all been hurt by the recession and will continue to be hurt.

But if there's one segment of the CRE market that is flat out doomed, it's America's shopping malls. The WSJ has an interesting post-mortem on a mall I've been to more than a few times, Charlotte's dying Eastland Mall.

The severity of the recession is turning some malls that were once viewed as viable into potential casualties. "Any mall that's sitting on life support is probably going to get its plug pulled" as the economy stalls, says Michael Glimcher, chairman and CEO of Glimcher Realty Trust, which owns 23 U.S. properties, including Eastland Mall in Charlotte.

One industry rule of thumb holds that any large, enclosed mall generating sales per square foot of $250 or less -- the U.S. average is $381 -- is in danger of failure. By that measure, Eastland is one of 84 dead malls in a 1,032-mall database compiled by Green Street. (The database focuses heavily on malls owned by publicly traded landlords and doesn't account for several dozen failing malls in private hands.) If retail sales continue to decline at current rates, the dead-mall roster could exceed 100 properties by the end of this year, according to Green Street. That's up from an estimated 40 failing malls in 2006, before the recession began.

"This time around, because of the dramatic changes in consumer spending practices, we're very likely to see more malls in the death spiral than we've ever seen before," says Green Street analyst Jim Sullivan.

Failing malls didn't get into trouble overnight, and most began their descent long before the tough climate. Typically, a mall begins to suffer due to job losses and other pressures in the surrounding neighborhood or because a newer mall opens nearby. The loss of key tenants -- such as the wave of department-store closures over the past three years -- hastens the demise. Also sapping malls' vibrancy: the increased preference among consumers for big-box stores, such as Wal-Mart Stores Inc. and Target Corp., which rarely operate in malls.

Developers, in fact, have been moving away from the enclosed-mall format in favor of big-box centers anchored by free-standing giants such as Wal-Mart or open-air shopping centers with tiny parks and outdoor cafes sprinkled among fashion stores. Only one enclosed mall has opened in the U.S. since 2006: The Mall at Turtle Creek in Jonesboro, Ark.

These pressures, coupled with landlords' difficulties refinancing debts in the bone-dry capital markets, signal tough years ahead for retail-property owners -- even after consumer spending begins to rebound. "The shopping-center bankruptcies and the REIT bankruptcies are the ticking time bomb that people aren't talking about," says Burt P. Flickinger III, managing director of Strategic Resource Group, a research firm.

Malls were pretty much screwed before the recession, in other words. With the recession and deep cuts in consumer spending these days, it's a certainty that malls in the country are going to start going under at an alarming rate. That means more lost lobs, less consumer spending, and more problems for the economy.

The next wave of the recession is coming. Count on it.