As the first quarter results are starting to come in from mall owners, words like “recover” and “rebound” pepper their comments as they look at improved performance across a number of retail sectors, including apparel. But even with the landscape improving, they’re still dealing with challenges that are weighing on either their rents, their occupancy rates or both.
“We don’t think this is going to be another ’17, where we’re going to see kind of an ongoing stream of Chapter 11s throughout the year. And so we’re definitely feeling better at this point this year,” said Stephen Lebovitz, president and CEO of CBL Properties.
Even with that, CBL is still feeling the effects of 2017 and it’s grappling with new issues this year, chiefly, The Bon-Ton Stores liquidation. The group has 16 stores under the Bon-Ton banners in its centers, all of which are expected to close by August. In total, Lebovitz said the closures will cost the company $7.3 million in annual rent.
But with this possible outcome on the horizon, CBL had been working to mitigate the fallout. “In anticipation of a liquidation, we’ve already been in active discussions with replacements for the majority of the locations and are also working closely with the other landlords to move those replacements forward,” he said, adding it will take years to overcome the loss. In one location, a supermarket has already signed to take over, and in another, a value retailer is expected to sign on.
Despite signing deals for more than 1.1 million square feet of space in the quarter, the company reported that rents are down by as much as 15 percent. Kathryn Reinsmidt, executive vice president and CIO, of CBL said expect that downward trend to continue for at least another quarter as it works with struggling retailers like Claire’s and Ascena. “We continue to work through maturing leases with certain struggling retailers as well as retailers in bankruptcy reorganization, where we are negotiating occupancy cost reductions instead of allowing stores to close,” she said.
Overall, occupancy for the quarter at CBL malls was down by 95 basis points.
For Taubman Centers, tenancy has remained steady year on year at 92.8% because the company has chosen to sacrifice rents in some cases to keep boxes full, according to CFO Simon Leopold, who said it’s important from a merchandising perspective to keep occupancy up. Because they’re making less off of these spaces, Taubman is signing shorter leases, on average 2.5 years or less. This will allow Taubman to maintain some flexibility so it can jump on better deals as the market recovers. As a result, the company anticipates being at 95 percent occupancy by the end of the year.
Even with those isolated cases, the company reported comp rents in the U.S. were up 3 percent in the quarter.
At Simon Property Group, the quarter ended with 94.6% occupancy, which represents a decrease from the prior year. The company attributes much of the 100-basis point decline to the bankruptcies of 2017 and the first quarter of this year, with new development contributing to roughly 30 percent of the decrease. “We do expect that we will get back to where we were last year, maybe a little bit better. But again, that will depend upon if there are a little bit more bankruptcies or not,” said chairman and CEO David Simon.
Rather than rush to fill the space, Simon said, the company is taking a measured approach, looking for the right tenants. Already, he noted, Simon has managed to find tenants for closing Bon-Ton locations, calling the bankruptcy “a non-material event for us.”
To help ensure that still more stores don’t exit the properties, the property group is taking a pro-active approach.
“One of the things that we’re very focused on is right sizing our tenants. So, where we have a tenant that we believe is got too much space, we will work with them and reallocate that space, get them to a smaller store,” president and COO Rick Sokolov said, adding the result is a win-win for everyone, the tenant is more productive and Simon gets space back that it can lease to another tenant. “That’s just like manufacturing new space without having to build it.”