Mall Owner Facing Tough Times Ahead
All stocks are down of late but General Growth Properties is downgraded. General Growth, a giant Real Estate Investment Trust (REIT), owns the St Louis Galleria Mall and roughly 200 more across the country. That is a lot of food courts.
NEW YORK – General Growth Properties Inc. shares plunged 48 percent Tuesday on concerns the real estate investment trust may not be able to refinance its debt maturities amid the larger credit crisis.
The stock shed $3.62 to $4.13 in afternoon trading. It fell as low as $3.51 earlier in the session, eclipsing its previous 52-week low of $7.08.
“The REIT’s stress is mostly due to over-leveraging acquisitions in the past five years,” Stifel Nicolaus analyst David Fick said in a note to investors on Monday
He said the company had bought too many properties using debt financing, which will soon come up for refinancing. It has also recently replaced its chief financial officer and suspended its dividend. (AP via Forbes.com
General Growth Properties (GGP), the nation’s No. 2 shopping mall company, may soon become the next giant felled by the credit crunch. Analysts believe that Chief Executive John Bucksbaum, who put the 54-year-old outfit deep into hock as he bought up retailing real estate across the country, could be forced to sell the company and its more than 200 malls nationwide because he’ll be unable to make payments on its staggering $27.4 billion debt load. “GGP is at the end as a going concern,” says RBC Capital Markets analyst Richard C. Moore II. “It’s time for them to go away.” (BusinessWeek)
That is some serious debt! How much is payments on that? The BusinessWeek article indicates debt service at “payments of about $1 billion due next month and an additional $3 billion next year.” A buyer for the entire company or individual properties will likely be found soon. Don’t worry, if you are headed to Restoration Hardware or The Apple Store in the Galleria this weekend they’ll be open.
So much of our country is saddled in massive debt. What is happening to General Growth is what happened to St Louis-based Pyramid Construction earlier this year – a melt down based on buying too much on credit.
Long ago the retailer lived over his shop. You had big department stores but those were often confined to just one market, not massive chains. These earlier retail models had debt but nothing on the order of General Growth.
Debt is everywhere. In suburbia that is about all they’ve got. In older walkable areas at least the fall back will be the more sustainable built environment. This is not a St Louis city vs county thing but an urban vs exuburban thing that doesn’t pay attention to municipal or county boundaries.
Malls used to be built all the time but the country may only see a handful built this year. They are not the sure thing they once were. In 50 years the indoor mall surrounded by a sea of free parking will be a thing of the past. It is the transition that will be interesting. We are already in the midst of it now.
Some malls will be razed with the sites built out in a more walkable model. Often an anchor store or two is left but the rest is taken out. This is already being done in other markets.
Turning the mall outward is a less drastic measure where some stores can be accessed from the outside rather than inside the main halls.
Retail real estate has gone through major changes over the last 50-100 years. We should expect change to continue. I recall the mall that opened when I was a kid — it was a short bike ride from my parents house. Today, 35 years later or so, it is a sad shell of its former self. Some discount store is in the old Montgomery Wards space and other anchor department stores have closed as well. Surrounded by highways but not much else the prospects are not good for this mall.
The mall is a victim of changing buying habits — on one hand the shift to a preference for a more walkable environment and the rise of Wal-Mart on the other hand. I hope the CBD is once again the retail center of metropolitan areas but I’m not going to hold my breath on that. I will be watching to see what becomes of General Growth Properties.
Government policies subsidized this mall-debt nightmare and unfortunately BigBrother will create public-private partnerships to facilitate equity transference as debt is magically reduced. Similar to seller financing, it will have government backing since conventional financing has practically vanished. Laws will be changed on the federal level in these “emergency times”. National security will be used like it has been for many years to rationalize the use of governmental powers to rob Peter to pay Paul.
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Historically we have used our capital markets and banks to finance good investment ideas. Those opportunities have been largely destroyed by a combination of weak regulatory enforcement and government policies that favors a minority over the majority. Rules enacted by the IRS and Treasury in the last week are unknown to 99% of the public and will dramatically change our markets for years (decades?) to come. Even news releases have not been made in some cases although public comment periods are required by law.
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Large malls with large parking lots are the products of a culture that favors convenience over quality. No where is this clearer than in the design of our transportation system that favors cars (that means large impersonal roads, highways as Main Streets, large-polluting SUVs, and acceptable injuries even deaths, etc.) over people. We are spending over $1 Billion per day to fund this self destructive behavior for gas alone. The New 64 is designed to favor truckers and sprawl over people and neighborhoods.
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We will pay dearly for these poor designs in ways few seem to understand. The destruction has been occurring in the credit markets as they continue to become dysfunctional. The stock market in the USA has declined in value by over $7 trillion in the last year. Our disease is spreading quickly to other nations. Our society-wealth continues to decline dramatically in value and public discourse will become even more hostile and resistant to change, just when it is most needed.
Yes, I agree, it is simply an extension of the general corruption of a capitalistic system that has been taken over by an elite who have shoved policies favorable to their personal profit down the throats of citizens for decades.
Most citizens have not understood the consequences up to now, and perhaps the elite will be able to patch things up so they can continue their greedy ways. However it should be a clear warning to everyone that until policy approaches are drastically modified the next collapse is just around the corner.
The overall meltdown hasn’t reached the commercial real estate market yet. It’s starting to reach out and touch it, but the free fall isn’t expected until 2009. The loose and fast credit market helped fuel the coming commercial bubble and 1031 exchange money had more investors with money that HAD to put into another property inflate it even more. It’s going to be quite a pop.
Many mall owners like GGP have revenue sharing plans with their retailers. GGP attempted to prevent many stores in the Galleria from displaying their websites on shopping bags as they didn’t want to lose these revenues to online sales. Now GGP faces the worst Christmas shopping season in over 20 years as piles of debt come due. Clearly the public’s need for instant gratification/convenience is being overwhelmed by the economic downturn too. Just released September sales data for retailers is worse than expected with sales down over 10% compared to last year.
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As reported by RFT, crime at the Galleria has skyrocketed in the last two years. Many shoppers who gotten use to large amounts of credit to fund their SUV-gas-consumption-credit card lifestyles have run out of extra credit. Will consumers face the same predicament as GGP’s CFO Freibaum who was forced to sell 3 million shares to meet margin calls as the stock sank over 80% this year to a new low?
The real problem with the Galleria is that it generally doesn’t have any stores you can’t find at many other malls in the area. This homogeneity of malls has proven to be their undoing–why drive past your local mall to the Galleria when every mall has the same stores more or less?