Shopping malls are running on empty

Shopping malls are running on empty

By Roger Vincent and David Pierson
November 24, 2008

Life Plaza Center in San Gabriel used to teem with diners heading to Green Village, a Chinese restaurant in the middle of the horseshoe-shaped mall on Valley Boulevard.

But after the eatery closed five months ago, the 7,500- square-foot space remained vacant. With no tenants stepping forward and fewer customers clogging the parking lot, the plaza is quiet, with a curiously dark core.

It’s a scene repeated in various forms throughout the region, as the economic crash that started rolling through single-family housing more than a year ago begins to hit shopping centers, turning what had been a residential phenomenon into one that threatens commercial real estate as well.

Business is so bad that an increasing number of retailers are calling it quits — without waiting to see whether money can be made as the Christmas season gets underway.

The department-store chain Mervyns closed in October — at about the same time Linens ’n Things Inc. and Shoe Pavilion Inc. launched going-out-of-business sales. This month, Circuit City Stores Inc. filed for Chapter 11 bankruptcy protection just days after announcing it would close 155 underperforming electronics stores and seek lower rents at others.

For property owners, the loss of tenants means more than a reduction in the revenue that is collected from rents. If one store closes, customers are less attracted to the center overall, and the losses can snowball. Whereas in previous years it was easy to find new tenants, now they are scarce. And as the property owners find themselves getting in trouble, their typical recourses — to sell the building or refinance it — are also stymied by the stuck economy.

At Life Plaza Center, the lack of interest from potential new tenants has surprised the plaza’s management. Located between Del Mar Avenue and San Gabriel Boulevard, the mall is situated in the heart of a long-thriving ethnic Chinese community. Potential tenants used to abound.

"We were charging $2.75 a square foot, but if we can get $1.75 for it, we’d be very lucky now," said Art Ko, a leasing agent for STC Management. "It’s hard to even grasp what’s a fair market price now. Everything is up in the air. We’ve had many deals where people just walked away the last minute. It’s a buyer’s market."

Ko’s company manages dozens of properties in Los Angeles and Orange counties. In recent months, they’ve experienced a rise in delinquent renters. One plaza in Rowland Heights has been hampered by a closure, an upcoming eviction and a business for sale.

"It was at 100% occupancy just half a year ago," Ko said.

A bad situation threatens to get worse after the holidays.

Christmas is always a key driver of merchants’ financial success, but this year it could mean life and death for many stores, analysts say.

Struggling businesses typically hang on through the holiday and then evaluate their financial position, said Malachy Kavanagh, a spokesman for the International Council of Shopping Centers, an industry trade group.

In most economically slow years, large retailers can cover for a Christmas shortfall with loans from their longtime lenders. But the credit crunch is keeping bankers on the sidelines, and even big players are having trouble getting the financial help they need.

If Christmas doesn’t deliver the usual windfall for merchants, the pressure on landlords to rewrite lease agreements and reduce rents in 2009 could become intense, said Stan Ross, chairman of the USC Lusk Center for Real Estate. That could put some shopping center owners in jeopardy with their lenders, especially if they can’t find replacement tenants for those that leave.

"The worst thing for a retail center is to have a lot of dark stores," said Ross, because it makes the center a depressing place to shop and can speed its demise. Fewer customers visit and more stores turn out the lights. "There is a domino effect," he said.

Far from lining up to grab available retail spots at any price, merchants from big chains to small mom-and-pops are asking for reduced rents and threatening to go out of business or move to cheaper digs if their landlords don’t acquiesce.

That’s a turnaround from three years ago, when department store mergers opened up large blocks of space but didn’t cause much panic with mall managers, which easily replaced them with other tenants.

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