Can you recall when the walkways of malls were filled with Bustling Kiosks and shiny model cars?
Those days of successful franchises filling the spaces is long gone and malls are soon to Ghost Malls.
For the last 20 years, the American consumer has carried the burden of the world on its broad shoulders. A heavy yoke, to be sure, but one that steroids made lighter; the steroid of choice for American consumers was debt. Home equity loans, cash-out refinancing, credit-card debt, and auto loans. It’s been a wild ride, but the it's over. The pseudo-wealth created over the last 20 years has begun to unwind, and will increase in speed in 2009.
A permanent psychological change has since occurred. American consumers have lost $30 trillion in value from their homes and investments in the last few years. No amount of fiscal stimulation will reverse this trauma, and the consumer’s subsequent retrenching will be felt from Des Moines to Shanghai. Consumer spending has accounted for 72% of GDP; it will revert to at least the long-term mean of 65%.
David Rosenberg, the brilliant Merrill Lynch economist, describes it thus:
"This is an epic event - the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007.Before the US economy can truly begin to expand again, the savings rate must rise to pre-bubble levels of 8%, that the US housing stocks must fall to below 8 months' supply, and that the household interest coverage ratio must fall from 14% to 10.5%. It's important to note what sort of surgery that is going to require.
"We will probably have to eliminate $2 trillion of household debt to get there, this will happen either through debt being written off, as major financial institutions continue to do, or for consumers themselves to shrink their own balance sheets.”
There are at least 1.1 million retail stores in the US, according to the Census Bureau. There are approximately 1,100 malls, not counting thousands of strip centers. These numbers will be considerably lower by 2011.
According to the ICSC, about 150,000 stores will shut down in 2009, in addition to the 150,000 that closed in 2008 and the 135,000 in 2007. Normally, 110,000 to 125,000 new stores open per year. At least 700,000 retail jobs will be lost; some major retailers that have closed or will close include: Circuit City (728 stores); Linens N Things (500 stores); Bombay Company (384 stores); Sharper Image (184 stores); Foot Locker (140 stores); Pacific Sunwear (153). Other large retailers are closing underperforming stores and scaling back expansions plans.
By 2011, at least 15% of the existing retail base will have gone to retail heaven. With the amount of vacant stores likely to reach in excess of 200,000 and vacancy rates for new malls already at 28%, there will be no need for new construction for many years.
Most of the retailers that are closing lease their locations from mall developers like General Growth Properties (GGP), Simon Property Group (SPG), Pennsylvania REIT (PEI) and Vornado Realty Trust (VNO). These developers will be hit by a quadruple whammy in 2009.
General Growth Properties added $4 billion of debt in the last 3 years, and is now teetering on the brink of bankruptcy. Simon Properties, which owns or operates 320 malls, added $3 billion of debt in the same period. Many smaller developers will be in even direr straits.
Many developers borrowed heavily to finance massive mall expansion. The term of these loans were generally 5 to 7 years. According to real-estate expert Andy Miller, the commercial collapse will be more rapid than the residential collapse:
“[You] may have 10 properties in a commercial pool that ultimately works its way into CDOs. Those loans are huge. You may have a shopping center loan in there for $25 million and an office building loan for $30 million dollars. As a result, if you have a default on just one of those loans, you can effectually wipe out all of the subordinate tranches.
“And that is why when you see the problems begin to appear on the commercial front, it's going to be a much quicker sort of devolution than we saw on the residential side. In the commercial world, most of the financing that happened outside of the apartment business was done by conduits, and there are no more conduits left, and conduits were doing the stupidest loans you could find.
"They were doing an advertised 80% loan-to-value, which was usually more closely aligned to a 100% loan-to-value. They were dealing with no coverage. They were all non-recourse loans. Many of them were interest-only loans. Those loans are now gone. You can't refinance them, and if you could, the terms would be onerous.”
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