Mall Rats

I moderated a panel last fall about the financial crisis, and one comment that stood out to me was that commercial real estate would be the big story of 2009. It appears that prediction is coming true. NPR had a story this morning about the huge mall company, General Growth Properties. GGP is in big trouble. And one ridiculous fact explains why.

The story points out that the U.S. has 20 square feet of retail space per person. That's six times more than any other country! These companies have built mall after mall after mall, and a lot of it with borrowed money. GGP borrowed billions to build up its mall empire, and now, like many homeowners, the company can't keep up with its mortgages.

A couple years ago, American Public Media did a series called Consumed where we asked the question, is our consumer economy sustainable? Can we keep over-developing and over-shopping and over-charging our way? Little did we know how quickly and how flagrantly the answer would come. Part of the series focused on the outrageous development of Las Vegas. Well, GGP owes $900 million on two shopping malls in Vegas that, let's just say, aren't getting a whole lotta foot traffic.

Conventional wisdom might be that Americans brought this upon themselves through their shopping mania. I'm sure to some extent that's true, but was there really such a level of demand for more malls? How many cities have you been to that look exactly the same, precisely because of all the malls?

These real estate companies overbuilt office space too, and what's truly startling is that they're still building more space. Check out this story in today's Arizona Capital Times. It says the vacancy rate for office space in the Phoenix area is almost 20 percent but that another 3.6 million square feet is under construction and is expected to hit the market this year. Good luck with that.

I've never enjoyed going to shopping centers. So many of them are eyesores. They were built in about five seconds on a piece of land that wasn't designed for a. anything to be built on it or b. a mall. I especially hate the ones where the parking spaces aren't big enough for a tricycle, and getting in and out of the place has the potential to break your will to live. But I've always just kind of accepted that we are a nation of strip malls, and sometimes you gotta go buy stuff. Plus, I like hanging out with people.

So this is even more distressing. Now, we might be a nation of empty shopping malls.

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It is disturbing and sad to see the endless strip malls across the US today. As mentioned above, they are definitely eyesores. (I also feel they fuel our extraordinary dependence on automobiles, but that's another topic for another day.) The article makes me wonder, though: Is anyone attempting to convert unoccupied real estate to other uses or to return the land to it's previous condition?

Up here in Prescott, the old territorial capital of Arizona, a major strip mall on the Yavapai reservation is emptying out, while our relatively new Gateway Mall has never been full and has just lost Linens n Things. Two new office buildings, one offering high-end "office condos", can't seem to fill significant vacancies, while our new Loew's seems stuck as far as fixing its crumbling parking lot (literally crumbling, as in going over the edge of it's apparently inadequate grade). Just a short step from our house there's a house that's been sitting half-finished for over a year and has just been posted by the city as a hazard, while just a block away from that is an entire townhouse development that's been sitting dormant for nearly as long, without even a model to show for it. Meanwhile, house after house in our neighborhood has gone rental, even though we're just a "short walk from historic downtown..."

On the positive side, a closed Fazoli's is being converted into a Panda Express.

Just thought you might like a snapshot of the effects of the downturn here in one of the "quaint" northern parts of Arizona.

It's greed. Greed has been encouraged for quite a while, even to the extent of rebranding it as patriotism. We have become a culture that bases value on money. Ethics and reason have long ago been thrown out the window. When a city has the chance to sell undeveloped land and assess new taxes... why wouldn't it? Solutions are more than obviously so no sense in restating them. Hopefully we will take our current situation as a lesson... at least for a couple generations until most forget the peril.

Scott's right with comm RE.
in other words:
"nobody's buying, everybody's selling."

stepping out on a limb:
there will be "squatters" in vacant
Comm RE by 2010. not just the young
bohemians. maybe families with babies.
maybe AARP-types. maybe legacy media.

I think what jake is referring to is that generally the loans are approx 5-15yr loans with a 25-35yr amortization which these REITs use to preserve capital and add cash when they refinance once again for the increased value of the property...which they use for their next project. Basic industry strategy but some were more reckless than others.

Thing is they never foresaw this market and spent and developed during the boom not having a contingency plan for the current situation.

Properties are performing well enough to survive but a. lenders are hesitant b. appreciation didn't meet expectations. These loans could have been more easily refinanced in the past but due to big retail names going under and extra-cautious credit markets, GGP must rely on the 'magic' of top execs to pull it off.

Agree, over leveraged and the US is flooded with retail. Good article with interesting points.

so GGP isn't paying its loans or they just can't get refinancing because there isn't billions of dollars in non-US funding because they were burned by the investment banks. get your facts straight. these mall operators are making money they just can't refinancing.

Jake, I'm afraid I don't see your point. Of course GGP's making money. They just aren't making enough money to pay back the astronomical debt load they put on themselves. And the way it looks right now, that's going to sink them right into bankruptcy. That's what can happen when you over-leverage your company.

It's sad- but unsurprising- that our American sensibilities have been dulled to the point that we can, straight faced, exclaim to one another, "Who cares about all those empty big-box retailers? Let's move on to pillaging the next unsullied piece of land and never look back! Avast, shazzam, etc!"

One wonders at the breathtaking short-sightedness of our general population. Is there any hope that we even can pause in our insatiable gobbling of the quickly-dwindling resources we have left?

Perhaps it's simply that we were lucky enough to have Economics lessons at Middlesex (I hear Choate's are still on backorder :).

I wasted my time reading this? How relevant is the 20 sq ft per person to any discussion? Land is cheap here. That is your measure?

Rather pathetic.

Choate, I don't see how it's not relevant. Multiply the square footage times the number of people in this country and think about how much land is being used for retail space. Now, think about how much of that space is empty or will be in the near future. Much of it isn't going be re-leased anytime soon, if ever. So, we have the China Syndrome. In China, cities have been way overbuilt with the expectation that the boom would be over-the-top and last forever. Now, those cities are full of empty buildings. At least some of them look pretty.

You're right. Land is cheap. These companies bought tons of it with borrowed money, and built on it with borrowed money and now they can't pay. And so, instead of some semblance of reasonable growth, we have an ugly glut.

That's what is pathetic.

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