Shopping Malls – The Pain Continues
Like a migraine that never seems to go away, the economic troubles at shopping malls continues to wreak havoc with investors all across the U.S., but especially in western states like California.
Particularly hard hit are facilities in newly developed communities or neighborhoods where real estate investors sought to serve what, at the time were considered huge influxes of new residents. Unfortunately, as the economy turned south, those influxes never happened, and today, with unemployment at 9.9% nationally and higher than that in areas of California, the new malls have little local support. Hardest hit, it appears, in addition to the newer malls, are smaller malls that don’t have marquee tenants.
Today, retail vacancies are at their highest levels in 10 years, even with the lowest rents as owners try to attract new tenants. Nationally, vacancies at small neighborhood and community malls are at 10.8 percent, the highest in almost 20 years. In California, which usually does better than the national average, vacancy rates were at 7.4% in December 2009, statewide, and 5.8% in the L.A. metro area. Over in the Inland Empire east of L.A., vacancies were at 11.6%.
So what are experts predicting in the months ahead? Most are suggesting you batten down the hatches. There could be more rough seas ahead.
One problem facing those investors is that it’s difficult to refinance your way out of a tough loan. Refinancing is still hard to come by. Commercial loans are usually shorter term, so as existing loans are rolled over into new loans, there could be an increased number of commercial foreclosures as financial institutions resist lower terms for stressed properties.
Another problem is that, in spite of the so-called “bailout”, banks seem to be holding on to bad properties. One reason is the relatively low number of well-financed buyers. Another could be uncertainty about which way the market will turn. If the unemployment rate continues to sink, banks will feel incented to offload properties at lower rates. In some cases, we’re seeing investors buying the notes but not the property. This could help flush out the inventory and clean up the bank’s portfolios, making them more willing to offer new loans with more attractive terms.
If the business climate improves-which seems unlikely any time soon-you could see that banks are more willing to offer attractive terms on properties they hold just to get rid of them. But until the banks see which way the economy goes in the Summer and Fall of 2010, don’t expect to see many bargains from your local financial institutions. In all likelihood, things will get worse before they get better. So what are mall owners doing in the meantime, especially those facing upcoming loan turn-overs and increasing vacancies?
Rents continue to drop in an attempt to lure tenants. A-level malls are pricing their space at close to B-level mall rates. Mall owners with cash are re-investing in their properties to attract better levels of foot traffic. For owners in the right property and with good financing, these could actually be good times as slowly improving economic numbers widen the trickle of consumers coming back into the shopping mode. However, according to most analysts, the real turn-around could still be some months off.
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