Vally View Is Just One Of Many More To Come

Implications: Depending upon which article you read, Macy's have announced between 88 & 97 closings of duplicate stores they purchased in the 2005 May deal. Most are still vacant and causing REIT owners and mall retailers, who are unfortunate enough to be located on the Macy's/May wing of the mall, very serious and expensive problems. Although hard numbers are almost impossible to obtain, industry "guesstimates" reveal that as many as 75 of these duplicate properties have been acquired by the mall owners and that most are still sitting vacant. As best as this writer can tell, only 6 or 8 have been retenanted by conventional department stores. Another 6 or 8 have been retenanted by discounters such as Target or Mervyn's. At least 10 more locations have been demolished and are in some stage of redevelopment as open-air lifestyle centers. Is this the coming of the end of Malls?

Analysis: As this article points out, the costs, time involved and difficulty in replacing the drawing power of a major department store, are formidable hurdles that all mall REITs face right now and will continue to face in the future. Although most of the malls that are struggling to find suitable replacements for their vacant department stores are classified as "C" malls to begin with and were struggling well before the May/Macy store closed, there are many "A" & "B" malls that are feeling the impact as well.

At the very least the real cost of losing these 90+/- department stores will start showing up in the comp sales of major REITS. Unfortunately the true costs of tearing down the old stores and rebuilding the new "Life Style wing" will not be as easy to determine due to the unique accounting Wall Street allows the REITS to continue clouding the bottom line.

Part of the cost will be due to the fact that the old department store generated and distributed customer traffic on EACH LEVEL of the mall. The one level life style center does not!

Another factor is that most of the "A & B" malls have been carefully merchandized by the developers as well as by the retailers who chose locations within the mall based upon the location of certain department stores.  With those stores no longer generating the type and amount of customer traffic they have paid rent for, those mall retailers will not renew their leases at the same high rents and may require an expensive relocation.

This will not happen overnight. It will take several years to work its way through the system. Another part of the problem is that many of the knowledgeable national chains will not want to relocate next to a Sears or Dillard in fear of another vacancy. This "musical chairs" effect will inevitably lead to congestion in the Macy's or Nordstrom wing and not everybody can be accommodated in those few remaining spots.
 
So what's a top quality mall REIT to do? Well, first of all they should start praying very hard that Messrs. Lampert or Dillard do not start closing their underperforming stores! Most "A & B" malls can withstand the gaping wound left by a vacant May store but few can withstand the almost fatal blow of having two empty department stores. In fact this situation has already caused the closing and/or demolition of numerous "C" malls around the country.

There will be much written (and there already has been much written about the "death of the Mall") by uninformed pundits and business reporters looking for controversial headlines.  Until they start collecting real data and doing a better job of analyzing the stupidity of Mr. Lampert's suggestion that he has any chance in hell of "MONETIZING' 200 or 300 under performing Sears stores by negotiating premium payments out of the REITS,  it will simply be background noise.