The Expert: Harsh Realities Bring Sector Full Circle

Although we hold out hope for the best outcome and outright survival of General Growth Properties, Inc., the Chapter 11 bankruptcy of this real estate titan was a devastating event for the Bucksbaum family and the REIT’s employees. Further, it is a terribly disheartening account for those who have long admired and truly respected the story of how Martin and Matthew Bucksbaum expanded their family grocery store business in 1954 with the building of Town and Country Center in Cedar Rapids, Iowa, one of the earliest retail centers in the Midwest. I personally was saddened by the events and hold nothing but respect for the Bucksbaum legacy that will endure beyond the profound times in which we all find ourselves. General Growth was the second-largest mall owner in the United States, and it will reemerge holding a different market position or with its properties continuing as an integral part of the retail landscape as we know it.Unfortunately, the story of General Growth’s largesse includes several other factors. Its bankruptcy also reflects one of the largest real estate failures in U.S. history, and its debt load, some $27 billion, is the most excessive ever experienced in the industry. Add to this the most severe credit and capital markets crisis that we have seen since the Great Depression, and one can understand, appreciate and put into perspective the catastrophic storm in which General Growth was heading and how it took a hit in the eye of the storm and lost.There is hope that the firm will be able to salvage some of its equity, but working through all the levels of debt is likely to take a great deal of time and expense. Most industry watchers believe that to prevent the firm from collapsing entirely, some malls in the REIT’s portfolio will need to be sold. If this happens, expect retail property prices and rents to see further pressure—this in a sector that already saw a 30 percent loss in value in 2008.This situation is further evidence of the tremendous amount of risk that owes to the oversupply of retail space. According to CBRE Econometric Advisors (formerly Torto Wheaton Research), first-quarter-2009 retail availability increased to 10.4 percent on a national basis and is expected to continue increasing throughout the year. Much like we saw in the early 1990s, and as reported in a 1992 issue of RERC Real Estate and the 1993 Emerging Trends in Real Estate, the nation’s retail property supply needs to be pruned before the retail slump can run its course. It should come as no surprise that back then, as now, “fundamentally strong malls with capital to spend on enhancements” and “large malls that are protected by barriers to entry and stronger lease covenants” will do best.As in 1993, the trend in excess retail space will eventually reverse itself and retail formatting will change. However, today the big-box retailers are the ones suffering, and the excess in their inventory will be pruned away. After all, how many Super Walmarts, SuperTargets and other such “category killers” can we use, especially when consumers continue to cut back on spending?And still cutting back on spending we are. Even the packaged-food industry, which was considered recession proof, saw an inflation-adjusted 3.7 percent drop in consumer spending during the fourth quarter of 2008, its steepest drop in 62 years. In addition, despite the early influx of tax returns into the economy, March 2009 retail sales fell 1.1 percent from the previous month, according to the Department of Commerce. Most economists had been projecting an increase of 0.2 percent, but the continuing loss of jobs, steep declines in household wealth, additional loses in retirement accounts and consumers’ desire to reduce debt and build up savings took their toll on sales. As a result, many retailers worry that consumers may have tightened their purse strings indefinitely.Is this deja vu, or more like George Carlin’s vuja de? The latter, according to the late stand-up comic, describes a sardonic situation in which one might state: “Hey, this has never happened to me before!” We all know deja vu: the feeling that you have already experienced what should be an unfamiliar situation. But what is valuable to innovation is Carlin’s vuja de: looking at a familiar situation with fresh eyes, as if you have never seen it before, and thus developing a new line of sight into the future.That new line of sight is very foggy today but shows us that there will be a long and painful revamping of the retail real estate industry. As we have mentioned previously, the industry will be gutted by the strongest, according to the Darwinian principle of the survival of the fitness. Somehow, we forgot the lesson of the 1990s, which revealed that real estate investors are directly linked to the retail merchandising—store and retail operation—side of the equation. This harkens back to the days when Martin and Matthew Bucksbaum quietly launched the General Growth story and ironically brings the saga back full circle in a voice that shouts that life has harsh realities, but we will continue with something old and lots of new. Unfortunately, the harsh and painful realities are still to come for many retailers.Ken Riggs is CEO of the Real Estate Research Corp.