UPDATE: CMBS Shutdown May Have Sealed General Growth’s Fate

The drying up of CMBS financing played a significant role in General Growth Properties’ decision to seek Chapter 11 bankruptcy protection, according to one retail analyst. Steven Marks, a managing director & senior REIT analyst for Fitch Ratings, pointed out that General Growth, the second largest owner of retail malls in the U.S., shouldered a huge debt burden that stemmed largely from its $12 billion acquisition of The Rouse Cos. in 2004. More than four years later, two elements of that transaction came back to bite General Growth: the Rouse corporate debt assumed by General Growth as part of the acquisition, and the fresh leverage that General Growth placed on the Rouse portfolio to finance the deal, Marks explained. General Growth’s debt has grown to $27 billion. “[General Growth] was so dependent on a functioning CMBS market that once that market ceased to provide any capital, the company’s prospects turned dim pretty quickly,” Marks said.Despite General Growth’s high profile and large portfolio, which encompasses ownership or management contracts at approximately 200 malls in 44 states, its bankruptcy filing will not be enough by itself to open the floodgates of retail asset sales, according to some industry veterans. “They likely will be selling some properties, but I just don’t see them in a position to [run] a fire sale,” said Bernard Haddigan, senior vice president & managing director for the national retail group at Marcus & Millichap Real Estate Investment Services. For the most part, he explained, retail investors are interested in only two categories of assets: small infill properties valued at up to about $10 million, or net-leased properties. However, a much anticipated third category has so far failed to materialize on a large scale, Haddigan pointed out: “The steals aren’t out there yet.” Jeff Green, president of the retail consulting firm Jeff Green Partners, agreed that General Growth could have trouble offloading assets. Green said GGP will likely downsize, but selling some of its centers may be difficult, as many potential buyers believe retail asset prices are still to high. Performance of some of General Growth’s centers may also be problematic. As a result of its 2004 acquisition of The Rouse Co.’s portfolio, it now owns tourism-based malls, such as New York’s South Street Seaport and Baltimore’s Harborplace, which may under-perform due to the drop in leisure and business travel, Green said. General Growth has also undertaken an initiative to retrofit some of its older regional malls into mixed-use, lifestyle centers, said June Williamson, associate professor or architecture at City College of New York, and co-author of “Retrofitting Suburbia: Urban Design Solutions for Retrofitting Suburbia.” She points to Cottonwood Mall, near Salt Lake City, which is being re-engineered into a “town center,” adding apartments and an open-air component, as a prime example. “I hope that work continues,” Williamson said.As Haddigan sees it, General Growth’s bankruptcy foreshadows a much larger trend. “While General Growth is huge news today, it just seems to me there’s a lot more…There’s a storm coming at us that is epic,” he said. Indeed, the size of General Growth’s bankruptcy means the retail real estate sector has now entered “uncharted territory,” said Green.Real Capital Analytics Inc. research suggests the size of that approaching storm; by mid-February, the value of distressed real estate assets tracked by the research firm had already reached $6.7 billion.Additional reporting by Paul Rosta