Mall rents coming down


POSTED: Saturday, February 07, 2009

NEW YORK » U.S. mall owners General Growth Properties Inc., Kite Realty Group Trust and Macerich Co., faced with rising vacancy rates in the recession, are being forced to accept lower rents from their remaining tenants.

Real estate investment trusts that own retail properties are getting snagged by co-tenancy clauses that allow merchants to pay less when anchors like department stores shut down, according to Real Point LLC data based on loan-servicer reports.

General Growth's holdings include Ala Moana Center and Ward Centers in Hawaii.

“;A year ago, tenants in major shopping centers were rarely invoking co-tenancy clauses,”; said Charles Daroff, a partner at Hurtuk & Daroff Co., a Cleveland-based law firm that specializes in real estate. “;Today, with the disappearance of major tenants and increasing vacancies, these clauses are being triggered.”;

Linens 'n Things Inc., Circuit City Stores Inc. and Steve & Barry's LLC are among retailers that filed for bankruptcy protection in the past year as consumers cut back. Sales at U.S. stores fell 2.7 percent in December, the sixth monthly drop in a row. That's the longest period of declines since comparable records began in 1992, according to the U.S. Commerce Department.

The decline in rental income could hurt mall owners' ability to make debt payments at a time when some are on the brink of insolvency, said Andy Day, a commercial mortgage- backed securities analyst at Morgan Stanley. Lenders may demand more onerous terms when refinancing debt, he said.

A growing number of shopping-center owners are falling behind on loan payments. The 60-day delinquency rate on retail property mortgages that were bundled and sold as bonds is currently 0.96 percent, compared with 0.32 percent in September, Morgan Stanley data show. Shopping centers and malls account for 27 percent of the $824 billion in commercial mortgage-backed debt outstanding, according to Morgan Stanley.

Co-tenancy clauses are built into leases to ensure tenants get the foot traffic they pay for. If an anchor store leaves, smaller tenants often have the right to pay less rent until the space is filled.

If it isn't filled, other retailers at the shopping center may be allowed to break their leases and leave.