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Retail exec: 'There will be more (mall) foreclosures to come'
By Kim Mikus | Daily Herald Staff

Arlington Town Square in Arlington Heights is undergoing foreclosure, but officials say the legal wrangling doesn't affect businesses or customers in the complex. Experts say expect more mall foreclosure fights to happen this year.

 

Bill Zars | Staff Photographer

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Published: 3/12/2010 12:00 AM

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While vibrant spring colors move into store windows, some recent developments demonstrate that the future may not be so bright for shopping centers across the suburbs.

First, mall giant General Growth Properties declared bankruptcy last year in the biggest real estate failure in U.S. history. Now, experts predict that smaller mall owners and landlords will follow, pointing to problems like the foreclosure lawsuit against the 29 investment firms that backed Arlington Town Square.

The investors were unable to make payments on their $19.8 million mortgage beginning in September for the publicly subsidized mixed-use project that houses a mix of tenants including Ann Taylor Loft, California Pizza Kitchen and Panera Bread.

Local village and business officials insist that business is good in the shopping center, and say the foreclosure won't be noticeable to customers. Still, economists say the recession is making it tough on strip malls, neighborhood centers and regional malls.

"There will be more (mall) foreclosures to come, particularly in those developments built in the past five to 10 years," said Neil Stern, partner at Chicago retail consultant McMillan Doolittle.

While some stores, primarily restaurants and coffee shops, appear to be thriving, other issues are putting the landlords behind in their payments. Debt and cash flow appear to be the primary concerns, experts say.

Retail analysts believe the debt was too high at Arlington Town Square.

"There was not enough cash flow to meet the debt," Stern said, adding that the center was purchased at a prime price before the real estate market tumbled.

Vacancy rates are another issue placing a heavy burden on retail developments. Shopping centers are losing stores at the fastest pace in at least a decade, according to a real estate industry report.

Arlington Town Center, operating since 2000, is about 87 percent leased, which isn't bad, said Charles Witherington-Perkins, Arlington Heights director of planning and commercial development, though he added that he would like to see it at about 95 percent.

When a mall has vacant stores, it's not only a loss in sales, but also adds to the burden of property taxes that must be paid by mall operators.

In 2009, retail tenants at downtown shopping centers and strip malls in metropolitan areas across the country faced a 10.6 percent vacancy rate, up substantially from 8.9 percent the year prior. Unfortunately, said Kyle O. McLaughlin, senior analyst with Reis, it's going to get worse before it gets better.

He expects mall vacancies to exceed historical levels through this year and 2011 before they stabilize in the middle of 2012.

"It just makes sense that we're going to see more mall foreclosures," McLaughlin said.

Landlords are trying to do anything they can to shore up vacancy rates, including lowering rents, he added. Mall owners lowered rents by about 3.6 percent last year, one of the biggest drops ever.

And it doesn't help that malls and retailers are unable to obtain loans in an effort to get through the tough times, experts say.

The increase in commercial real estate foreclosures has many village economic developers concerned and taking a cautious approach toward the future.

"I continue to hear about the problems through the ICSC (International Council of Shopping Centers)," said Peg Blanchard, Barrington Economic Development Director. She said so far Barrington is all right, but that the economic conditions have forced at least one Barrington retail project to be placed on hold until the market improves.

"It think we're all very aware of what's happening out there. We're attuned to the market," Blanchard said.