Shopping Centers Begin to Feel Ripples of Housing’s Ills

Retail shopping centers have always been a fairly secure way to make a profit as a buy-and-turn real estate investor, at least in metro areas that are growing due to the demographic shift in the United States over the last thirty years. However, the recent housing bubble burst, and the sub prime mortgage rate meltdown means that that’s a bit less of a certainty than it was a year ago. You can no longer count on shopping centers rising in price faster than single family homes – though, to be fair, they’re not declining as rapidly as the deflating housing bubble has either; where the average single family home selling price is dropping by 10-15%, most shopping centers are dropping by 8-10% for second and third tier properties; first tier shopping centers are still retaining some value.

What’s causing some concern is that this may just be the calm before the storm. More investors are finding that deals are simply blowing up in their faces, due to rising interest rates reducing the profitability of the venture, and the uncertainty of the resale market. Indeed, that resale market volatility may be about to hit tsunami-grade overflow, as several companies that bought markets on extended credit are trying to liquidate ahead of the market, particularly in areas where newly completed malls have tied up capital, and occupancy rates have started to decline. The current credit market is also making national chains close stores more precipitously than they have, historically. While closing stores aren’t necessarily a bad sign – it allows you to hunt down a tenant with a higher rent – it’s in the realm of canary in the coal mine as a signal.

To weather this crisis, look at your local demographics. Upscale shopping centers, much like the consumers who buy at them, will find that they’re moderately insulated from the credit crunch. It’s the strip malls catering to lower income families that are going to run into issues, and be the first victims, as their consumer base contracts, and in many cases, loses homes to foreclosure. Likewise, properties in areas where there IS no nearby area for development, will find that they’re going to get a regular stream of tenants. Likewise, cities like San Diego, Phoenix and Portland, with strong population growth are reasonably safe for the moment. However, the suburban strip mall, particularly in middle class and lower middle class driving range, may be in serious jeopardy.

Another trend to look for are the kinds of businesses your tenants run. So called “power centers”, like Home Depot or Staples are reporting declining sales – look for tenants who sell necessities (food, clothing, liquor) if you’re looking to insulate yourself from a credit bounce. The current debt market will also act as a brake on new businesses forming, as it becomes more difficult to finance those first two years of operations.

That being said, if you’re looking to enter into the commercial real estate market, the pickings should be good for the next six to nine months as this credit crunch shakes itself out.

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