Regional Malls Facing Challenges to Stay Afloat During Economic Recovery

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Leading commercial debt resolution firm Covendium examines the troubles facing regional shopping malls, and recommends steps to increase their solvency rate.

commercial debt restructure

Covendium specializes in comprehensive commercial debt restructuring and resolution.

Like residential real estate, bank lending was easy and retailers and restaurants were scrambling to sign leases near to new residential construction.

Vacancies at U.S. regional malls and shopping centers increased to their highest level in 11 years in the first quarter of 2011, doubling since 2005, according to a report published in the Wall Street Journal. High rates of vacancy and reduced rents are making it difficult for many mall operators to sustain a positive cash flow. Commercial debt restructuring specialist Covendium examines the effects of this problem nationally and in the Carolinas.

“During the home-building boom of the mid-2000s, there was an equal emphasis on shopping center construction to support the new residential communities,” comments Gary Stephens, Regional Director for Client Development for Covendium, the nation’s largest commercial debt resolution and advocacy firm. “Like residential real estate, bank lending was easy and retailers and restaurants were scrambling to sign leases near to new residential construction.”

And while consumer retail spending is seeing a modest recovery from the depths of the past few years, commercial lending remains tight and shopping center owners are unable to increase rents to fill unoccupied space. “To cover their cash-flow over the past few years, mall operators lowered rents and requested longer lease terms. Many of those leases are coming due and lessees are pushing for even further reductions, putting the operator in a position where they have to choose to rent below cost or risk extended vacancy,” says Mr. Stephens.

Carolina mall operators aren’t immune from this trend. According to an article in the Charlotte Observer, almost over a quarter of the 23 shopping malls they analyzed in the Carolinas were flagged by their loan servicers as stressed. National chains such as the Gap, Borders, Cache and others have eliminated existing stores—leaving large anchor space unrented.

Britt Beemer, chairman and founder of America’s Research Group, told the Charlotte Observer that some malls will continue to struggle even if the economy gains steam. He noted that the Carolinas, along with the rest of the country, have too much retail space—as much as 20 percent too much.

John Hyltin, Managing Director for Client Resolutions at Covendium, is well aware of the problems commercial real estate operators face. “Our most distressed clients aren’t the least experienced, but the ones who had the bad luck of closing on their property when money was easy and real estate was booming. The banks aren’t prepared to manage these properties without the operator, but many operators are afraid to enter into discussions with their lenders, because they are afraid that the banks might foreclose if they knew the extent of their distress.”

Mr. Hyltin recommends that operators take a realistic look at their business and the market-rent necessary to keep their properties at 90% or higher occupancy. If they cannot be cash-flow positive at market rent, they should contact a commercial debt resolution firm like Covendium to help them work with their lender to lower their interest rate, change their term or even restructure their unpaid principal balance.

For more information about how Covendium can help commercial debtors negotiate with their lenders, or any of Covendium’s products or services, call them at (407) 284-4000, or view them on the web at http://www.covendium.com.

Bad things happen to good people. Covendium is a premier national debt resolution firm that helps their clients with everything from commercial foreclosure in Charlotte to recapitalization in Miami to unpaid principal balance in Phoenix to discounted pay off in Chicago.

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Jonathan Gorman
Covendium
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