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Seeking retail therapy

22 June 2020 By Jennifer Saba

Three recent events portend a grim outlook for U.S. mall owners: Weakened retailers are skipping rent, a deal between two rivals has punished the buyer’s stock, and a bankrupt middling department store may get a lifeline from landlords.

The pandemic has yoked together retailers and mall owners more tightly than ever. Brookfield Property Partners, one of the biggest shopping center owners in the United States, is haggling with tenants to pay rent. That includes shops from the little kiosk operators, the Financial Times reported on Sunday, to bigger companies like the Gap, which stopped paying money on some of its stores and is taking the opportunity to strategically re-evaluate its real estate. Even the luxury labels realize the rent is too high. Valentino is heading to court to terminate its Manhattan boutique lease on a stretch of Fifth Avenue, according to the Wall Street Journal.

Without the income, cash is getting tight, and mall owners may run into trouble paying their own mortgages. Earlier this month Simon Property ditched a $3.6 billion all-cash deal to buy its rival Taubman Centers, saying its target had mishandled Covid-19. Walking away bolsters cash coffers in the near term, but Simon has paid a price for the move. Its market capitalization has shed $5.6 billion since it announced it wanted a clean break.

Even the creative solutions have sobering reasons. Simon and Brookfield may team up to pluck J.C. Penney out of Chapter 11. The challenged retailer has plans to close 20% of its more than 800 stores. That spells trouble for Simon especially, which counts J.C. Penney stores as anchors in more than half of its U.S. malls, according to its annual report. If J.C. Penney successfully navigates the courts, it can renegotiate leases and have a domino effect on other surrounding tenants that peg terms of contracts to anchors. Owning J.C. Penney would be a way to effectively ensure payment – to themselves.

Mall owners can try to encourage, demand or even acquire their troubled tenants in order to delay their reckoning. But the landlords best hope that the bad omens only come in threes.

 

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