Dismal holiday sales weigh on mall owners

NEW YORK (Reuters) - The dismal holiday shopping season may sink some retailers and could take down some U.S. malls struggling with rising vacancies, softening rents and their own large debt loads.

"This is probably going to go down as the worst season in history as far as retail sales," said Victor Calanog, director of research for real estate research firm Reis Inc. "The difficulty of ascertaining what the effect would be at the property level is because we're already heading toward a train wreck."

At the end of the October, the International Council of Shopping Centers (ICSC) forecast that national chains would announce 6,100 store closings in 2008 and 3,100 in the first half of 2009. That was before stores such as Circuit City Stores Inc (CCTYQ.PK) and KB Toys Inc filed for bankruptcy.

But factoring in nonchain stores and others classified as retail by the U.S. Census Bureau, ICSC predicted 148,000 retail stores would close in 2008 and 73,000 would do so in the first half of 2009.

During this holiday season until Christmas, retail chains, which are among the best bankable mall tenants, saw apparel sales fall 19.7 percent, according to SpendingPulse, which tracks holiday sales. Electronics and appliance chains sales dropped 26.7 percent, and luxury goods plummeted 34.5 percent.

A general rule of thumb is that a mall can stay afloat if 30 to 40 percent of its tenants remain in business, Calanog said. But that percentage will have to be higher to sustain those malls that are burdened with debt, such as General Growth Properties Inc GGP.N, the No. 2 U.S. mall owner.

LEVERAGE

"The leverage is what's going to kill them," said Bret Wilkerson, chief executive of Property & Portfolio Research.

That means that some malls will be grappling with less income while facing oppressive debt costs.

"You've got pressure from both sides here," Calanog said.

Reis forecasts that the fourth-quarter mall vacancy rate could top 7 percent, the highest since Reis began tracking regional mall performance in the start of 2000. It sees fourth-quarter mall rents falling by 0.1 to 0.4 percent.

All retail properties, not just large malls, may see their rents fall by an average of 3.5 percent in 2008 and 5.5 percent in 2009, according to Property & Portfolio Research.

The research firm tracks "economic vacancy," or the amount of retail space that surpasses the amount that sales can support. Economic vacancy now stands at about 13.5 percent and is expected to peak at 17.3 percent in the third quarter of 2009, "implying that one out of every six square feet needs to just go away," Wilkerson said.

The deteriorating U.S. retail landscape is expected to further divide the Class A malls from the lower-quality Class Bs and Cs, where tenants are likely to close stores first.

Many of the Bs and Cs are susceptible to ailing department store anchor tenants such as Bon-Ton Stores Inc (BONT.O), Dillard's Inc (DDS.N) and Sears Holdings Corp (SHLD.O), according to analysts at Green Street Advisors.

Those malls include some operated by Glimcher Realty Trust (GRT.N) and CBL & Associates Properties Inc (CBL.N), according to Green Street.

'DISPROPORTIONATE EFFECT'

"If it's one of the anchor tenants, typically that has a disproportionate effect on the overall revenue streams of the location given that the anchors are involved in a lot of foot traffic to the center," said Steven Marks, managing director for Fitch Ratings.

Bankruptcies among retailers are likely to rise in the first quarter of 2009, Marks said. But given the long leases and lengthy process of closing a store and winding down operations, its effect on the mall owners may not kick in until next year and 2010 when landlords are unable to release shuttered spaces.

To head off the impending crunch, mall owners may have to rethink their mix of customers by adding value-oriented stores to luxury malls and help their existing tenants.

"As the recession drags on, there is perhaps a greater likelihood that landlord will offer some concessions if it keeps the tenant out of bankruptcy," BMO Capital Markets analyst Paul Adornato said.

(Reporting by Ilaina Jonas; Editing by Brian Moss)