In the ongoing collapse at the stock market, big names get the most ink. Weighed down by excessive debt and bad bets in its finance division, industrial giant General Electric has shed more than 80 percent of its value over the last year. Not long ago, it counted as the most valuable corporation in the world. Now, smart people are openly wondering whether it will be the next too-big-to-fail recipient of a government bailout.
AIG, once the globe’s premier insurance company, now exists solely by the charity of the U.S. Treasury. It has already consumed $180 billion in taxpayer cash; observers expect it to gobble at least another $70 billion, bringing its total price tag to a staggering quarter trillion dollars.
Citigroup, Bank of America ... the list goes on: once-mighty corporations that now must beggar the taxpayer in order to live, and whose stock trades at pennies to the dollar of recent valuations.
Here’s a name that deserves a bit more attention in this financial meltdown: General Growth Properties, which owns, manages, or has interests in more than 200 shopping malls in 45 states. Staggering under a massive debt load and battered by the bad economy, General Growth looks headed for bankruptcy or a fire sale. As recently as last June, its shares fetched $40. Today, you can snap one up for less than 40 cents.
Does General Growth’s plight augur the un-malling of America? Maybe. The Wall Street Journal reported recently that:
Last year, [mall-based] retail sales on a per-square-foot basis in the top 54 U.S. markets declined by their greatest extent since the 1990-91 recession…. Vacancy rates at U.S. malls climbed to 7.1% in the fourth quarter, the highest rate since real estate research firm Reis Inc. started tracking the figure in 2000. And average rents have started to decline.
The mall industry, like so many industries in the modern global economy, thrives on rapid growth fueled by easy credit. Now credit has dried up, debt needs to be repaid, and sales growth has gone into reverse.
Time to start thinking about other economic models?
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Comments
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Sean Casten Posted 5:51 am
08 Mar 2009
This is not as intrinsically risky as it is in a mortgage market, for the simple reason that corporations have income. (e.g., a mortgage is ultimately tied to the value of the home, whereas a corporate loan is typically tied to the income of the company.) As long as the loan is not a huge multiple of the income, that's not a particular irresponsible loan - but it does depend on the ability of the company to refinance that loan before the 'bullet' hits. GG - and many other companies - have found themselves in a situation where their time-window to refinance those loans came at a rather inopportune time when no banks want to lend money to anyone. It is thus a harbinger of a massive potential wave of corporate defaults driven by the huge volume of 'bullets' that are coming due on corporate loans over the next 18 months. (I've heard in excess of $1 trillion worth of those loans.) If the banks choose to force those companies into bankruptcy rather than restructure their loans, there is a massive 'second shoe' to drop in the financial sector.
On the other hand, the downside of bankruptcy from the lending banks perspective is that they then end up owning an asset that they can't readily turn into cash, for the many of the same reasons (after all, few can get a loan to buy a business right now either.)
Thus my earlier comment about the attention this story has gotten in the financial industry. Every side of this transaction from a financial perspective stands to lose, and it's not clear who's going to move first.
In any event, I hate malls too, but I think ultimately the ramifications are much larger.
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Tom Philpott Posted 5:57 am
08 Mar 2009
Victual Reality
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Sean Casten Posted 6:39 am
08 Mar 2009
But it's pending disaster for a whole lot of companies that - by most measures - were not being particularly irresponsible with their debt.
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JMG Posted 7:17 am
08 Mar 2009
http://is.gd/mqR6
Salem, by the standard of American smallish cities, enjoys an enviable downtown, with its beautiful old buildings preserved and a reasonably lively streetscape at night. It's dead in comparison to some much larger cities, but plenty of others are even more dead than Salem at night.
But it looks as those the retail collapse -- the end of the line for the "shop 'til you drop" mentality and the easy credit whirlwind -- could take out Salem Center's owner. The death of the landlord doesn't kill the tenants, but the tenants, especially the chain department stores are already struggling terribly, which means that Salem might have gaping vacancies in its downtown core within the next couple years.
One of the opportunities/challenges that groups like the Salem Transition Initiative for Relocalization (STIR) will face all over America is how to put dead retail spaces (both freestanding big boxes and downtown stores) to productive use.
As the consumer-driven economy runs aground, it's going to scatter a lot of flotsam and jetsam of empty stores that are peculiarly ill-suited for other uses, at least within the narrow range of thinking typically applied. We think in terms of replacing one failed tenant with a similar competitor, who refaces the building and continues on.
But in the world of tomorrow that's arriving today, the endless square miles of expensively lit and air-conditioned retail space surrounded by even more parking has little chance of success.
First of all, with the number of firms failing, it's going to be hard to find many Retailer B's to go where Retailer A's have failed. Secondly, the costs of operating those structures are already killing retailers now; when the effects of peak oil really kick in the low-margin retailers will likely not survive in anything like their current form.
Thus, people who are attuned to the problem now have a great opportunity: we need to start envisioning ways that former retail spaces can be reused in new ways. Obviously, anything with a big expanse of roof should be considered for rooftop gardens and distributed solar power production. How about housing? Can these spaces be used to house people inexpensively, despite the high ceilings? Is there a way to use these buildings to provide decent shelter?
Salem is likely to face some opportunities along these lines.
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cheflovesbeer Posted 3:28 am
09 Mar 2009
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