Action figures After last year’s dismal performance – and the bankruptcy of development giant General Growth – the US retail sector should be back on track next year, and UK firms want a piece of the action. By Noella Pio Kivlehan
The date for the diary is 2011: that is the year when it is predicted the US retail market will finally get back on track. This year is set to be a stabilising 12 months, but it is next year that the US economy is expected to return to form.
Gerry Mason, executive managing director of Savills in New York, says: “2010 is going to be a very slow beginning to the recovery. We will start to see a couple of deals being done and then a couple more. It’s going to be a long, drawn out process, and 2011 will be the year of real recovery.
US retailers had a good, if not particularly outstanding Christmas, with sales up 3% overall on the previous year. “The numbers are better than last year, but last year was our worst Christmas in 30 years. So it couldn’t really have gotten any worse,” says Mason.
There is no getting away from the fact that when the recession hit the US, it hit hard.
Among the casualties, one shocked the retail market to its core. On 16 April 2009 the unthinkable happened: development company General Growth, which has one of the largest – and arguably the finest – shopping centre portfolios in the world, filed for Chapter 11 bankruptcy. It was the biggest real estate bankruptcy in US history.
The company fell into financial difficulties after running up $27bn in debt during an acquisition spree that turned it into one of the country’s largest shopping mall owners. It is second only to Simon Property Group, which owns or has an interest in 385 properties comprising 263m sq ft of gross leasable area in North America, Europe and Asia. SPG is now one of several potential bidders for General Growth (see panel, p39).
General Growth’s bankruptcy prompted one US analyst to remark: “This is kind of the beginning of the end. This bankruptcy will drive down the values of mall assets in the US. It’s going to put, I believe, more supply on the market than can be absorbed by investors.”
The predicted end did not come, however. Yes, assets were driven down, but the markets did not collapse. In January, General Growth announced it had restructured loans totalling $9.4bn, releasing 96 properties from bankruptcy. Restructuring of the remaining $2.1bn of debt covering 16 properties was expected within weeks.
The retail market as a whole has been increasing its sales figures for the past five months, as emphasised by the Christmas 2009 figures. But it is far from out of the woods. Mason expects between 100 and 150 US malls – out of a total of approximately 50,000 – to close in the next few years. And there will be little, if any, new development. “We have over 7bn sq ft of retail in the US; that’s 24 sq ft per person – it’s the highest in the world. We don’t need more any retail,” says Mason.
However, he adds: “Psychologically, it feels better out there.”
The investment market is certainly seeing signs of recovery. Says Mason: “We are talking to everybody: from pension and sovereign funds, from Korea and China.” Investment from the Middle East “has pretty much shut down” because of the region’s own financial problems, he says. “Their sovereign funds have turned inwards.”
It is this money that the beleaguered US market will be glad to see. With a Darwinian turn of phrase, Mason sums up the cyclical nature of the market: “We eat our young – and then we reconstitute.” And so it seems that the US, having stripped out its failing retail elements, will rebuild once again.
GENERAL GROWTH FACTS
Founded in 1956, the company’s biggest markets are:
Atlanta with 6.05m sq ft
Dallas with 5.67m sq ft
Las Vegas with 5.62m sq ft
Chicago with 5.22m sq ft
Houston with 5.17m sq ft
Source: Real Estate Economics, New York
GENERAL GROWTH PROPERTIES
When General Growth Properties, one of the US’s biggest developers, filed for Chapter 11 protection last April, it signified just how ferociously the recession had hit the nation’s retail sector.
Following a huge acquisition drive, the company had $29.5bn in assets alongside debts of about $27.3bn in the Chapter 11 filing.
At the time, General Growth president Thomas Nolan said: “We intend to emerge as a leaner company. We want to come out as a less leveraged company. Our business model remains strong.”
Gerry Mason, executive managing director of Savills in New York, puts it simply: “General Growth is a prime example of what happened [during the recession]. They had too much debt.”
At the time, commentators were predicting that Simon Property Group, the US’s largest mall owner, would cherry-pick the more promising of General Growth’s shopping centres. But as of 25 February, that prediction has not come true.
In mid-February, SPG offered to pay $7bn to General Growth’s creditors and $3bn to shareholders in a deal that would combine the US’s two top retail giants. But as EG Retail went to press, General Growth reached a deal with Canadian company Brookfield Asset Management, which has been trying to expand its portfolio to US retail property. The move means that General Growth could thwart SPG’s unsolicited $10bn takeover bid.
Whatever the final outcome, the question is what will happen to the company’s 200-strong property portfolio, revered in the retail world.
“There is nothing wrong with the properties,” says Savills’ Mason. “It is one of the best portfolios in the US, if not the world, but General Growth should come out of the recession with an aim to sell a couple of malls.”
But even selling the buildings throws up another problem, as Mason highlights. “The perceived value of their properties is unsure, because of how property prices have fallen over the past couple of years. The flip side, however, is if you bring a good retail property to the market, then people are lined up 10-deep to buy it.”
And this, he says, is because the bottom fell out of the shopping centre market in 2009: “We didn’t sell a single mall last year. There were 12 deals done in total in the US. Eight of those were JVs and the others were distress sales, which were $10-$20 per sq ft.
“Nothing much has changed. There are very few deals being done, but I do expect more.”
Given the interest in General Growth’s portfolio, this will be almost a certainty.
FROM THE UK TO THE US – THE INVASION INTENSIFIES
Primark is setting its sights on the US. The fast-fashion chain, which has taken the UK’s retail market by storm, aims to join the likes of Top Shop and All Saints in cracking the tough American market.
“We met with Primark and we had a project we went to them with,” says Brad Mendelson, Cushman & Wakefield’s executive vice-president of retail services in New York. “They came to New York to see Top Shop and said, ‘It is time we started looking at the States.’
Despite Primark’s denials, Mendelson believes a move to New York “is on their agenda, but they are not ready to bite it off until they understand it”.
He adds: “However, I would be shocked if Primark was not over here within four years. We do already have tenants similar to Primark here, but not like Primark are doing it.”
David Shulman, president of US property firm Chainlinks, also speaks positively about Primark’s potential success in America: “I personally think that Primark would do very well in the US because they are value orientated, and they would be unique.”
If Primark does make its move stateside, it will join the other UK fashion stalwarts of Top Shop and All Saints, which Mendelson says have been “very well received”.
He adds: “In the past almost every British retailer had a hard time doing business here. It was almost a curse, but in truth the types of retailers who are now making the move over here are totally different – and [coming over here] will be a definite trend for the next few years.
“Following the success of Top Shop, the UK retailers are watching what Philip Green is doing and what All Saints is doing.” Mendelson believes that Top Shop will grow slowly in the US, because “it has to be in units of around 40,000 sq ft – Green is pushing the megastores”, while he says All Saints can grow faster since “they can take smaller stores of 18,000 sq ft”.
These expanding retailers and the newcomers will mainly look for street-front units. “I don’t believe that these new names would go into malls – maybe the country’s top six malls, but not the standard malls,” says Mendelson.
And there will be no jealousy from homegrown retail brands. “The US retailers like the fact these new fascias will drive more traffic for them,” says Mendelson. “The likes of Forever 21 and Abercrombie are thrilled that these new names will bring in the shoppers. Everybody is looking for something different.”
