With its decision to file for bankruptcy on Thursday, Chicago-based General Growth Properties will probably be forced to sell part of its vast retail empire.
And some in the industry are wondering what a distress sale by the country's second-largest mall owner would mean for the already-weak commercial real estate market.
"One worst-case scenario is that there will be a real liquidation of these assets, a forced sale, driving down prices even more," said Peter Slatin, editorial director and associate publisher of Real Capital Analytics, a research firm whose clients include many institutional investors.
The commercial real estate market has been on life-support lately, largely because of a sudden, dramatic drop-off in financing.
Many retail property companies saddled themselves with vast amounts of short-term debt, often to fund expansions. Now that those loans are coming due, the credit crisis has made it virtually impossible for many to refinance. At the same time, the recession has diminished retail traffic, driving many stores out of business and leaving many storefronts vacant in malls.
General Growth Properties was a prime example of a company that grew too big, too fast.
Since going public in 1993, General Growth made a number of high-profile acquisitions of shopping malls in every part of the country. Some of General Growth's biggest included:
—the $1.85 billion acquisition of Homart Development Co. from Sears Roebuck in 1995, said to be one of the largest real estate transactions in history at the time;
—the $625 million purchase of U.S. Prime Properties Inc., a real estate investment trust that owned six regional shopping malls, in July 1998;
—the purchase of eight U.S. shopping centers from the British company MEPC for $871 million.
But the biggest deal by far was General Growth's purchase of the legendary Rouse Co. for $12.6 billion in August 2004, which added 37 regional malls, four strip malls and six mixed-use projects to its portfolio. Among the properties it acquired were New York's South Street Seaport and Boston's Faneuil Hall Marketplace, the first of the so-called urban festival malls that helped revitalize downtowns in many places.
Today, General Growth owns, develops, operates and/or manages shopping malls in 44 states, comprising 200 million square feet of retail space, as well as planned communities in Nevada, Texas and Maryland.
While the company says all of its properties will operate as normal for now, it's expected to sell off some of them as part of debt restructuring. Among those who may bid on the properties are Simon Property Group, the country's largest mall owner, and Westfield Group of Australia.
But with the sharp drop-off in commercial real-estate, the malls are likely to fetch considerably less than they might have two years ago, Slatin says.