Economist Paints Bleak Picture For Malls

Could this spell the demise of the Elk Grove Promenade even before it opens?


Economist James Quinn paints a very bleak future for the future of commercial real estate and malls in particular. Quinn, a University of Chicago fiscal conservative, has blamed the continued collapse of commercial real estate and overall economic malaise we find ourselves in on the unintended consequences of cheap oil, artificially low interest rates, over indulgence by the American consumer and low savings rates.

In a posting today called Ghost Malls Will Be Appearing," Quinn noted:

Mall owners and commercial developers are on the brink of bankruptcy. Commercial developer CB Richard Ellis didn’t sound too optimistic in a recent 10Q filing. He stated, “We are highly leveraged and have significant debt service obligations. Although our management believes that the incurrence of long-term indebtedness has been important in the development of our business, including facilitating our acquisitions of Insignia and Trammell Crow Company, the cash flow necessary to service this debt is not available for other general corporate purposes, which may limit our flexibility in planning for, or reacting to, changes in our business and in the commercial real estate services industry. Notwithstanding the actions described above, however, our level of indebtedness and the operating and financial restrictions in our debt agreements both place constraints on the operation of our business.”

As Americans realize that they don’t “need” a $5 Starbucks latte, IKEA knickknacks, Jimmy Choo shoes, Rolex watches, granite counters, and stainless steel appliances, our mall-centric world will end. As low prices become the only factor that drives retail sales, retailers will have lower profits in the future, further restricting expansion and renovations

General Growth Properties, a mall developer which owns or operates 200 malls, added $4 billion of debt in the last three years and is teetering on the brink of bankruptcy. Simon Properties, which owns or operates 320 malls, added $3 billion of debt in the last three years and will be greatly affected by the coming downturn. Many smaller developers will be in even dire straits. With shrinking cash flow, looming debt refinancing, and dim prospects for a resumption of conspicuous consumption, Mall developers are destined for a bleak future.

Every major retailer in the United States has built their expansion plans on an assumption that American consumers would continue to spend at an unsustainable rate. That crucial assumption error will lead to the bankruptcy of any retailer that financed their expansion with debt. Warren Buffet’s wisdom will be borne out, “Only when the tide goes out do you discover who’s been swimming naked.”

So if Quinn is right, will General Growth Properties, or it successor, ever complete construction of the Elk Grove Promenade?