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Sunday, April 12, 2009 1:02 AM

America's Love Affair With Malls Ends; Toxic Drywall; Halted Projects; and Vacant Dealerships

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Four hundred of the 2,000 largest shopping malls have closed; construction is halted on hi-rise construction projects; and no one knows what to do with the increasing number of vacant auto dealership lots.

Let's take a look at each of those commercial real estate disasters starting with The Vanishing Shopping Mall.

Enclosed shopping centers, long the cathedrals of American consumerism, are closing their doors by the hundreds as the recession continues to clobber retail sales. Is America’s love affair with the mall over?

The vital signs are not good. Even before the recession hit, consumers had developed mall fatigue, and the classic enclosed shopping mall was in decline. More than 400 of the 2,000 largest malls in the U.S. have closed in the past two years. The last new major mall in the U.S. opened in 2006, and only one big mall is scheduled to open this year—the troubled Xanadu mega-mall in Rutherford, N.J. With some 150,000 retail stores projected to fail in the U.S. this year, more mall closings are imminent. Mall mainstays such as Mervyn’s department stores, Linens ’n Things, and KB Toys have already disappeared into bankruptcy, and mall vacancy rates topped 7 percent last year, the highest level since 2001. “It’s an absolute disaster,” says Howard Davidowitz, an investment banker specializing in retailers. “What a mall represents is discretionary spending, and discretionary spending is in a depression.”

Is it really that bleak?

The data suggests that it is. For decades, American consumers could always be counted on to spend more than they did the year before—the only question was, by how much. But in the past 12 months, retail sales in the U.S. have dropped an unprecedented 9.8 percent. The economic collapse has landed especially heavily on the old-line department stores, such as Sears and JCPenney, that anchor many malls. As their sales and profits have tanked, they’ve been pulling out of malls, to the distress of the smaller merchants that depend on the larger stores to feed them traffic. The Turfland Mall in Lexington, Ky., recently lost Dillard’s as an anchor tenant, setting off a cascade of closings. “We have no choice but to leave now that Dillard’s is leaving,” says Bill Parker, who just closed his shoe store.

If malls go, could downtowns come back?

In this economy, not likely. Some developers have already tried building “lifestyle centers” in downtown areas left blighted when stores and shoppers fled to the outskirts. But there is no single “big fix” that will pump life back into downtowns full of boarded-up stores, says development expert Teresa Lynch.

The last mega-mall?

Talk about bad timing. June is supposed to mark the opening of the Xanadu mall on a stretch of New Jersey swampland just across the Hudson River from Manhattan. But it might not happen. When developer Larry Siegel broke ground on the $2.2 billion, 2.4-million-square-foot mall in 2004, he promised that Xanadu would be the ultimate “shoppertainment” experience, with an indoor ski slope, a fishing pond, and even a 30-foot-high chocolate waterfall. But as the recession has deepened, plans have been repeatedly scaled back. Prospective tenants, including Virgin Megastore and Borders, have bailed out, and no anchor tenants have yet been signed. Siegel is vowing to carry on. “We’re not building this for the next 18 months,” he says “but the next 50 years.” The chocolate waterfall, though, has been scaled down to 4 feet.
I predict near immediate bankruptcy if and when this boondoggle is complete. There's lots more details in the article. It's well worth a read. In other commercial real estate news ....

Construction Financing Ceases To Exist

Oregon Live is reporting Construction of downtown Portland high-rise is halted by tight credit.
Construction of the Park Avenue West tower in downtown Portland has stopped, with the project frozen three floors below ground.

Tom Moyer, one of Portland's most successful real estate developers, will halt work Monday on his 32-floor tower now under construction in downtown Portland. Moyer's decision to pull 350 workers off the Park Avenue West is a stunning sign that no city, no person and no block is spared from this recession.

"Construction financing does not exist right now," said Vanessa Sturgeon, president of TMT Development, Moyer's company, which is building Park Avenue West.

"I get a little bit mad about it," said Bart Eberwein, vice president at Hoffman Construction Co., general contractor on the project. "The banks are getting the money, but they're not lending it out. Until private lending picks up, we are going to be in a prolonged slump."

Moyer had expected to pay for the construction himself and had kept up payments to his contractors.

Real estate brokers had taken to saying that Park Avenue West would be built by the "Bank of Tom Moyer." Moyer owns land throughout the Willamette Valley, and Sturgeon said the company planned to borrow against some of those holdings to fund the Park Avenue West.

But even the "Bank of Tom Moyer" has its limits.

Sturgeon said the book values of Moyer's other land holdings have fallen. Plus, lenders have tightened their requirements on loans and cut the amount of debt that borrowers can incur. In past years, lenders would allow developers like Moyer to borrow up to 75 percent of a property's value. Now, it's 45 percent, Sturgeon said.

"It's unprecedented," she said.

At the job site Friday, the concrete, mechanical and iron workers left the site about 3 p.m. with the building 15 percent finished. It remains just a parking garage, frozen for now about three floors below ground.
Another "immune" city goes down hard.

Honk If You Need Land

Vacant car lots are piling up, so Honk If You Need Land
It appears that vacant auto dealerships may soon join obsolete enclosed malls and the growing inventory of empty big-box stores on the list of former robust retail properties in need of an alternative use.

Already at overcapacity, automakers have been trying to reduce the number of dealerships for years with mixed success. The recession will likely do what the automakers could not -- bring the number of dealerships in line with demand. President Obama's call for more extreme turnaround measures for both General Motors and Chrysler is only expected to add to the number of un-needed dealerships.

According to the National Automobile Dealers Association (NADA), approximately 900 dealerships closed and 200 dealerships opened in 2008, for a net loss of 700 dealerships, leaving the country with approximately 20,000 franchised auto dealers. According to Detroit-based research and advisory firm, Urban Science, 2008's decline in auto dealership count is the largest the firm has recorded since it started collecting data in 1991. For 2009, the NADA forecasts a net loss of 900 additional dealerships.

According to CoStar Property Professional, 5.4% of auto dealership properties across the country are vacant and another 3.7% are available for lease, bringing total availability to 9.1%, or 1,023 "spaces" for lease; this compares to 3.5% vacancy about one year ago. Additionally, CoStar COMPS data shows that there are currently 1,861 auto dealership properties actively listed for sale across the country.

Unfortunately, CoStar's statistics show that auto dealership properties coming onto the market aren't going anywhere fast. The current "for sale" inventory not only dwarfs the number of auto lots that have sold so far this year (only 95), but is about equal to the total number of auto dealership properties that sold during 2008, 2007, and 2006 combined. Additionally, auto dealership properties currently for lease have already been on the market for an average of 9.6 months.
Chinese Drywall Poses Health Risks

Here's a bonus residential housing story to consider: Chinese drywall poses potential risks.
At the height of the U.S. housing boom, when building materials were in short supply, American construction companies used millions of pounds of Chinese-made drywall because it was abundant and cheap.

Now that decision is haunting hundreds of homeowners and apartment dwellers who are concerned that the wallboard gives off fumes that can corrode copper pipes, blacken jewelry and silverware, and possibly sicken people.

Shipping records reviewed by The Associated Press indicate that imports of potentially tainted Chinese building materials exceeded 500 million pounds during a four-year period of soaring home prices. The drywall may have been used in more than 100,000 homes, according to some estimates, including houses rebuilt after Hurricane Katrina.

The drywall apparently causes a chemical reaction that gives off a rotten-egg stench, which grows worse with heat and humidity.

So far, the problem appears to be concentrated in the Southeast, which blossomed with new construction during the housing boom and where the damp climate appears to cause the gypsum in the building material to degrade more quickly. In Florida alone, more than 35,000 homes may contain the product, experts said.

A Florida Department of Health analysis found the Chinese drywall emits "volatile sulfur compounds," and contains traces of strontium sulfide, which can produce the rotten-egg odor and reacts with air to corrode metals and wires.

Dr. Patricia Williams, a University of New Orleans toxicologist hired by a Louisiana law firm that represents plaintiffs in some of the cases, said she has identified highly toxic compounds in the drywall, including hydrogen sulfide, sulfuric acid, sulfur dioxide and carbon disulfide.

Prolonged exposure to the compounds, especially high levels of carbon disulfide, can cause breathing problems, chest pains and even death; and can affect the nervous system, according to the CDC.

John Willis is moving out, even though he can hardly afford to walk away from a house he's owned for just three years. He cries as he speaks of his 3-year-old son's respiratory infection, which eventually required surgery.

"They basically took out a substance that looked like rubber cement out of my 3-year-old son's sinuses," he said. "My wife and I are now faced with the choice between our children's health and our financial health. My children are always going to win on that."

The subdivision's builder, WCI Communities, is in Chapter 11 bankruptcy restructuring and can do little more than log complaints, said spokeswoman Connie Boyd.
Add drywall to the list of tainted products coming from China. That list includes tainted cough syrup, toxic pet food, toys decorated with lead paint, and now toxic drywall. Lawsuits are going to fly over this story, as well they should.

Mike "Mish" Shedlock
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