Retail tenants starting to fight or flee

It seems as if the current economic recession is now firing up the 'fight or flee' response in some retailers' hypothalami: when landlords refuse to negotiate leases, store owners are teaming up, filing for bankruptcy protection or simply gathering up their belongings and fleeing in the middle of the night. It's happening in downtown Los Angeles, in San Diego and elsewhere.

Firstly, a post at HousingCrisis.com on this new trend summarizes stories from Mish, Calculated Risk and, finally, what's happening in the apartment market from Multi-Family Executive.

Secondly, while conducting research for an upcoming economics conference in San Diego on April 14th, I came across this story in the San Diego Union-Tribune on what's going on in that city's waterfront Seaport Village:

Merchants at the eclectic Seaport Village shopping complex are seeing something they've rarely seen amid the T-shirt shops and jewelry stores: empty storefronts and liquidation signs.

There's the shop near the waterfront that once housed The Cabbage Tree. Its owners recently took the “midnight run” – emptying the gift store in the wee hours and disappearing, leaving landlord Terramar Retail Centers to try to collect on the lease obligation.

Across the sidewalk, there's the “Closed for Inventory” sign hanging in the window of Whitt/Krauss Objects of Fine Art. The art gallery filed for Chapter 7 bankruptcy in January, owing creditors for everything from a $5,640 catering bill to about $250,000 in projected 2009 rent and maintenance fees.

And a few steps away, the Big Dogs sportswear shop is holding a liquidation sale as the Santa Barbara chain prepares to close all of its 71 stores.

It's the perplexing problem afflicting many shopping malls, strip malls and retail complexes across the United States: Owners of commercial properties are trying to preserve cash flow to maintain their mortgage obligations and make a profit. Retail tenants, hard-hit by the recession, are asking for rent reductions and in some cases are shuttering their businesses and leaving empty storefronts...

Many analysts predict that retail bankruptcies and shopping center vacancies will accelerate sharply this year if the economy continues to deteriorate and consumers remain on the spending sideline. And as stores close, landlords will have trouble repaying loans.

While no one knows the ultimate price tag, as much as $1 trillion worth of U.S. commercial property could undergo foreclosure if the economy and the credit markets don't improve, according to Stanley Tate, president of Miami-based Tate Enterprises and an adviser to the Federal Reserve.

The real estate developer said landlords and tenants need to be negotiating now to work out new lease terms or other financial breaks that will allow stores to survive, and allow landlords to maintain some cash flow on properties that might otherwise be vacant.

“It's going to get worse, not better, for at least another year, and the smart landlord will do their best to work with tenants to see what they can do to keep them in business,” said Tate, who a few months ago gave all his tenants in several commercial properties a 15 percent decrease in rent.

In some cases, tenants who had weak businesses to begin with or have products particularly hard-hit by the recession can't be salvaged, Tate said. And some landlords, particularly those who bought or developed properties in the boom years, have little wiggle room to renegotiate lease terms because of their own debt, he said...

Whether some way to provide rent or other financial relief is devised, it will come too late for art gallery owner Jack Krauss.

Krauss said he approached Terramar in November about reducing his rent and fees to $15,000, with an upside for the landlord if sales improved. Krauss said he was told the company would take it under consideration, but he never got a formal response.

“A rent reduction would have made a big difference; it would have given us a fighting chance,” said Krauss, 72, whose business filed for Chapter 7 bankruptcy. “I was fighting to the end, and they (Terramar) were aware of it.”

Like many tenants at Seaport Village, Krauss, who has operated the gallery for more than 25 years, signed a personal guarantee on his lease. So his only option is to reach a settlement with Terramar or file for personal Chapter 7 bankruptcy to eliminate the rent obligation.

“This took all my reserves, my savings and the money I'd put away for retirement, and I'll probably have to sell my home,” Krauss said. “I'll have to find a good doorway to live in."

Very sad indeed.