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As General Growth Stumbles, Region Joins Retail Slump

By Ylan Q. Mui
Washington Post Staff Writer
Monday, April 20, 2009

The downfall of mall developer General Growth deals a blow to the local retail industry, which has remained relatively insulated from the economic storm battering the rest of the nation.

The company, which filed for bankruptcy protection last week, had ambitious plans to renovate several properties in the Washington area. Just last year it unveiled a proposal for expanding the Mall of Columbia, the centerpiece of the planned community in Howard County. Plans to rehabilitate the ailing Landmark Mall repeatedly have been put on hold. General Growth also operates Laurel Commons, which is undergoing a massive overhaul.

"General Growth has been crippled now for a year and a half," said Gregory Leisch, founder of Delta Associates, a commercial real estate research firm. "They haven't been able to sell anything. They haven't been able to buy anything. They haven't been able to redevelop anything."

The company has said that the timetable for future development is uncertain but added that the main roadblocks are the credit crunch and lack of capital.

Many of General Growth's properties and partnerships filed for bankruptcy independently, including Landmark Mall and Tysons Galleria in McLean. The Mall in Columbia, along with Laurel Commons and the Shops at Georgetown, were not on the list of entities included in the bankruptcy filings.

The company's biggest creditors are large banks and institutional investors. However, several local companies are also listed in court documents as having significant unsecured claims. General Growth owes Pepco $1.8 million. Architecture firm Torti Gallas and Partners in Silver Spring has a claim of $245,304, and several local construction companies are each owed about $100,000.

General Growth established itself as a local presence in 2004, when it bought Columbia-based developer Rouse for $7.2 billion. However, the move also saddled the company with debt and helped contribute to its current cash crunch.

Several analysts said General Growth's problems were largely financial -- it was carrying $27 billion in debt -- rather than poor management of its properties. Its local malls boasted low vacancy rates: Tysons Galleria, the Columbia mall and Landmark all were at least 95 percent leased. General Growth executives have said they are determined to make the bankruptcy process invisible to shoppers.

Still, the collapse comes at a difficult time for the shopping center industry, which has battled rising vacancy rates and falling rents as retailers close stores amid the sharp decline in consumer spending. In 2008, sales per square foot at shopping malls fell 5.2 percent, to $393, compared with the previous year, the first decline since 2002, according to the International Council of Shopping Centers, a trade group. In the Northeast, sales per square foot fell 13.4 percent in January compared with the previous year -- slightly better than December's 14.4 percent drop but still a significant decline.

"The one wildcard that we're looking at here is what's going to happen with store closings across the country," said Jay Spivey, senior director of analytics for research firm CoStar Group.

In the Washington region, mall vacancies averaged 2.7 percent during the first quarter, according to CoStar, up from 2.6 percent in the previous quarter. Rents fell to $20.47 per square foot during the first quarter from $21.41 per square foot.

The region has been relatively insulated from the nation's economic woes. Government data released Friday showed the unemployment rate fell slightly in the District in March compared with the previous month, and slowed its upward climb in Maryland and Virginia. But economists expect the national rate to keep rising -- and that is likely to depress consumer spending.

Research firm ShopperTrak predicted traffic at shopping centers will fall 13 percent during the second quarter, which would likely translate into a 2.4 percent decline in sales. The firm does not anticipate a recovery until next year.

"Unfortunately, the sales and traffic declines we're anticipating for the next three months aren't a real shock to retailers as the economy remains in the doldrums and both retailers and consumers alike feel the pinch," said Bill Martin, co-founder of ShopperTrak.

Staff writer David S. Hilzenrath contributed to this report.

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