Slowing Economy May Hurt Owners of Shopping Centers

Fallout from the less-than-merry holiday shopping season may prove as painful to Southern California shopping center owners as it was to their retail tenants.

Poor sales, a slowing economy and a surge in shopping center construction will keep the pressure on retailers and raise the prospect of higher vacancy rates and lower rents for property owners, say real estate and retail analysts. A growing list of retail failures, such as Montgomery Ward, and expectations of slower growth may force developers to rethink future retail projects, substituting office buildings, industrial parks or housing for stores.

“Some projects that once seemed to make sense a little while ago make less sense today,” said Rob York, a retail consultant at Fransen Co. in Santa Monica. “Retail may no longer be the highest and best use for some sites.”

Many local developers and brokers, however, remain optimistic about the outlook for specific projects and markets. But even those who are confident have been taken aback by the economy’s sudden downshift and the disappointing holiday shopping results.

Chris Wilson, a broker who handles leasing at neighborhood shopping centers across the San Fernando and Simi valleys, said he expects only a slight slowdown in the economy this year. But he will keep close tabs on tenants for signs of trouble.

“We are watching all of them,” said Wilson, president of West Los Angeles-based Wilson Commercial Real Estate. “When you come out of a weak fourth quarter and Christmas, you start to see either closures or announcements of closures.”

Montgomery Ward, for example, will close eight stores in Los Angeles and Orange counties at a time when many malls are looking for new ways to generate foot traffic. In many of those cases, such as Eagle Rock and Rosemead, the department store served as an anchor tenant that drew customers to the shopping center.

Worries about local retail real estate stem from the relatively large amount of new retail space, about 5 million square feet annually, that has been added in recent years. The value of Los Angeles County retail building permits has swelled from $272 million in 1997 to an estimated $500 million last year, according to economic statistics.

Even in Orange County, where a shortage of available land has curbed construction, more than 2.5-million square feet of new space was added during the last two years, according to statistics provided by Grubb & Ellis Co.

But, unlike new industrial and office development, retail construction may be on the verge of overshooting demand, particularly in light of slower sales, say industry observers. For example, taxable sales in Los Angeles County, which grew by more than 10% annually in the last two years, are projected to increase by only 6.5% this year, according to economist Jack Kyser of the Los Angeles County Economic Development Corp.

“If you are in retail real estate or a mall owner, [2001] is going to be a very challenging year,” Kyser said. “This retail [building] binge is going to come back to haunt us.”

But some real estate observers and players say that any fallout from a slowdown will be limited.

“I would not say that chain retailers have pulled in their horns as far as their interest in expanding,” said Brent F. Howell, a retail leasing expert at CB Richard Ellis Services Inc. “We’ve had a steady increase in rents and land values. I don’t see them dropping.”

The retail properties with the most to lose are the smaller strip shopping centers populated by mom-and-pop businesses that lack the financial resources to outlast a slowdown, said Ben Reiling, a Los Angeles developer. But Reiling has no concerns about the fate of his 900,000-square-foot shopping center under construction on land once occupied by a Lockheed aircraft plant. Costco, Target, Lowe’s and Best Buy are among the major national retailers that have signed long-term leases at Burbank Empire Center, scheduled to open this fall.

“While a bad recession can hurt them . . . it’s probably not going to cause them to miss a rent payment or put them out of business,” said Reiling, president of Zelman Development Co.

Major retailers will remain interested in establishing or expanding their presence in densely populated urban areas of Los Angeles, said developer Jerome Snyder.

“These retailers need to be where the people are,” said Snyder, who is building shopping centers in West Hollywood and Westchester. “Maybe they will not go into marginal locations but . . . they need to grow and want to grow.”