Dead Mall Syndrome: The Self-Reinforcing Death Spiral of Retail

Tyler Durden's picture


Submitted by Charles Hugh Smith from Of Two Minds

Dead Mall Syndrome: The Self-Reinforcing Death Spiral of Retail 

Retail CRE is highly leveraged and loaded with staggering amounts of debt that rests on leases that are only as good as the retailers' profit-loss statements and solvency.

The decay of the "build it and they will come" model of commercial real estate is gathering speed for a simple systemic reason: the decline is self-reinforcing in several critical ways.

Before we start the analysis, let's ask a basic question: How much of the stuff and services purchased at retail outlets, malls, strip malls, etc. is absolutely necessary and how much is excess consumption?

Conventional "Growth by any means" Cargo Cultists such as Paul Krugman never ask this basic question, because the answer (very little is essential, most is excess consumption) undermines the entire narrative that all growth is good, even the most marginal, unsustainable, wasteful and fiscally imprudent.

I've captured the essence of retail in America with this photo:

Put another way: what if Degrowth is the future, for a variety of structural reasons? If so, the need for billions of square feet of commercial space will implode.

Degrowth, Anti-Consumerism and Peak Consumption (May 9, 2013)

Looming U.S. Retail Implosion: DeGrowth 2014
(December 4, 2013)

There are two primary self-reinforcing dynamics in retail CRE (commercial real estate): consumerist and financial. Let's start with the consumerist dynamic, which is composed of several interlocking feedback loops.

1. As the cost of big-ticket household expenses such as healthcare, energy, college, etc. rises while real income declines for the bottom 90%, households have less disposable income to spend on excess consumption--another tattoo, skinny-triple-mocha-fudge-lattes, 13th pair of shoes, etc.

I addressed the decline in real income yesterday in The First Domino to Fall: Retail-CRE (Commercial Real Estate).

2. The rise of eCommerce is eroding the desire to drive to the mall, strip mall, etc. when the goods can be delivered to one's door by the Brown Truck Store (Mark G.'s phrase).

3. As anchor chain stores and other key retailers reduce inventory and slash investment in maintenance and store improvement, the attractiveness of these physical places declines dramatically. Shopping in a decaying sepulchral cavern with little inventory on the shelves is not very appealing.

4. As chains close anchor stores in malls, foot traffic declines and the feeding chain of smaller retailers starves. The "cool/fun" factor of a mall declines exponentially with store closings. It's just not much fun to stroll through a huge space filled with closed storefronts and few other shoppers. In fact it can be a quite depressing experience.

The financial self-reinforcing dynamics are equally pernicious. Correspondent Chris H. (U.K.) recently described the precarious dependence of property valuations on long-term leases:

The book value of the properties is based on the attainable rents. If just one property in the portfolio has to settle for a lower long-term rental rate, that will devalue the entire 'book to market' portfolio. Just a few low 'book to market' evidence-based valuations and the whole sector could collapse.

One way to dodge that bullet is to not offer any long-term leases. Another is to entice major tenants to sign high-value leases with various guarantees (that the mall will maintain a certain occupancy rate, etc.).

The primary point here is that CRE is highly leveraged and loaded with staggering amounts of debt that rests on leases that are only as good as the retailers' profit-loss statements and solvency.

As Mark G. noted in his overview After Seven Lean Years, Part 2: US Commercial Real Estate: The Present Position and Future Prospects, the standard commercial real estate loan is not a 30-year mortgage; it's a short-term mortgage ( 5 to 10 years) with a huge balloon payment that's due at the end of the term--a balloon payment that requires refinancing.

That need to refinance will force lenders to examine mall owners' leases and the valuations that are based on high occupancy and lease rates. As anchor tenants vacate and smaller tenants close up in their wake, how many of these retail properties will justify their previous valuations? What happens to these properties when the balloon payment can't be paid because the owners cannot refinance?

There are three other financial factors to consider:

1. Many of the healthiest malls are "premium outlets" that cater largely to foreign tourists and the dwindling class of upscale American households. Should a global recession occur, tourism will take a hit, along with the ability of foreign tourists to buy thousands of dollars of luxury brand handbags, etc.

2. Since the top 10% of U.S. households is heavily dependent on bonuses, ownership of stocks, real estate appreciation, etc. for their income gains, a rollover in equities and residential real estate would negatively impact the "wealth effect" that has powered their five-year long shopping spree.

3. Much of the "growth" reported by retailers has resulted from poaching existing store sales: The American Model of "Growth": Overbuilding and Poaching (November 19, 2013).

Once the wheels fall off this model of "growth," chains will enter a cycle of closing marginal stores to boost profits. That will place additional pressure on retail properties as once-reliable chain tenants exit marginal properties en masse.

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Wed, 01/22/2014 - 12:25 | 4355543 So Close
So Close's picture

Less jobs, stagnating wages, more online shopping, and aging population = Bad for retail.  

Wed, 01/22/2014 - 12:27 | 4355555 LawsofPhysics
LawsofPhysics's picture

The manufacturers of adult diapers and their salesforce disagree with your conclusions.

Wed, 01/22/2014 - 12:48 | 4355623 jbvtme
jbvtme's picture

correct me if i'm wrong (as i'm sure you will) but wouldn't these vacant malls make excellent detention centers for political malcontents?

Wed, 01/22/2014 - 13:02 | 4355684 BoNeSxxx
BoNeSxxx's picture

I was just thinking about this very topic the other day as I wandered from room-to-room in my house... How much is crap vs. how much I would actually take with me if I cared about it...

I concluded that everything I gave two shits about would fit neatly into a small duffelbag (not counting the means to defend said duffel).

And, yes, you are correct.  The next boom will be 're-purposing' these malls... penal colonies, subsidized housing, indoor farms, who knows?

Wed, 01/22/2014 - 13:15 | 4355747 jbvtme
jbvtme's picture

i'm down to reading glasses and toilet paper

Wed, 01/22/2014 - 13:27 | 4355757 Headbanger
Headbanger's picture

Empty malls would make for great indoor shooting ranges!

Can you imagine shooting some 300 yards indoors in the middle of winter!?

But then too, I like shooting in snow.  I must have fought on the Eastern Front in a previous life. Not sure on which side though!

Wed, 01/22/2014 - 13:42 | 4355814 New World Chaos
New World Chaos's picture

Biker gang headquarters.

Big spaces for burnouts, races, and of course shooting.  Wide kill zone outside.  A few easily guarded entrances.  Little side rooms with roll-down bars could be used as dungeons, meth labs, whatever.

Wed, 01/22/2014 - 14:06 | 4355898 Headbanger
Headbanger's picture

Don't forget go cart courses for the biker kiddies!

And how could you leave out tattoo shops, motorcycle repair and accessory shops, leather shops, pizza and pool halls!!??

Wow... That could easily fill the whole Mall of America along with a few bordellos, movie theaters (Easy Rider always showing)

Plus chain martial arts studios, a Hard Rock Cafe, ... and a monster truck arena!


Wed, 01/22/2014 - 14:11 | 4355956 Son of Loki
Son of Loki's picture

"They didn't build that!"

Wed, 01/22/2014 - 14:31 | 4356014 Dr. Richard Head
Dr. Richard Head's picture

Based on the trends I have witnessed coast-to-coast, I would venture a guess for repurposing into brothels, gambling joints, and pot shops, along with Japanese-style coffin bed appartments. 

Wed, 01/22/2014 - 14:47 | 4356032 Manthong
Manthong's picture

Right now, I am rushing out to buy..  


oh.. but if anybody has any extra factory mags for a Beretta 96 to sell, I am a buyer.

Wed, 01/22/2014 - 15:47 | 4356289 0b1knob
0b1knob's picture

Is the end game of this that Walmart is the last retailer standing and uses its monopoly status to screw the public?

Wed, 01/22/2014 - 16:04 | 4356366 Headbanger
Headbanger's picture

How about Japanese style brothels, gambling joints and sushi shops??

Wed, 01/22/2014 - 18:14 | 4356851 Manthong
Manthong's picture

Attention K-Mart shoppers.. Under the flashing blue light..  a special on little Asian girls?

Wed, 01/22/2014 - 14:13 | 4355966 FEDbuster
FEDbuster's picture

Classic Blues Bros mall chase:

Wed, 01/22/2014 - 14:47 | 4356063 Pure Evil
Pure Evil's picture

Well, in our little West Coast Florida town this has already happened and more.

We had four major chain stores and three of them have already vacated the premises, the last two closed shop just within the last four months.

The remaining anchor store Kmart may be on the list to be closed ever since Walmart opened up its first super store and then added two more stores.

Whenever I go to the mall its deader than a doorknob and Kmart barely has anyone shopping in it. Of course the store is located in a sparsely populated corner of the county while the Walmarts all built locations next to heavily populated areas.

There are still smaller retailers but quite a few have called it quits. In what was once the Sears anchor store an indoor golf course has been opened but I didn't see to many paying customers playing indoor golf, and mostly kids with no money except what the parents give them.

Wed, 01/22/2014 - 14:50 | 4356074 corporal
corporal's picture

Notice they broke OUT at JC Penny.

Wed, 01/22/2014 - 19:01 | 4356902 Manthong
Manthong's picture

I have shopped there.. albeit prior to the time they shuttered it and it became a great movie set.

Speaking of shopping, tomorrow I get to pick up the sweet little Laser-Max thing that I can plug this here Ruger BX-25x2  into. 

When the SHTF.. this is the piece I toss to the missus.

At close range 50 x .22 is as good as a few .45 ACP's, .40 S&W or even a .50 BMG or two.

:-D   -    embrace the fantasy

gee.. after having actually watched this last video, it is amazing to note the affinity the piece has to my physiology..

Ron Jeremy, eat your heart out..   :-)

Wed, 01/22/2014 - 13:17 | 4355760 max2205
max2205's picture

Teardown the mall and build McMansions....fixed it

Wed, 01/22/2014 - 14:09 | 4355940 Handful of Dust
Handful of Dust's picture

"Earth to earth, ashes to ashes, dust to dust."

Wed, 01/22/2014 - 17:39 | 4356641 0b1knob
0b1knob's picture

"Ashes to ashes, fun to funky"

"We know MajorTom's  (Choomboy) a junky"

Wed, 01/22/2014 - 14:50 | 4356073 Uncle Remus
Uncle Remus's picture

"Tear down the mall! Tear down the mall! Tear down the mall!"

Wed, 01/22/2014 - 15:35 | 4356241 ebear
ebear's picture

"Mr. Gorbachev - tear down this mall."

Wed, 01/22/2014 - 14:12 | 4355960 yrad
yrad's picture

I heard Cramer (yes, I watched Squak this morning) say that CRE was a "bright spot" in the economy. Head, in, sand...

Wed, 01/22/2014 - 14:16 | 4355977 FEDbuster
FEDbuster's picture

"Head in sand", corrected, Head in ass...

Wed, 01/22/2014 - 14:50 | 4356077 Uncle Remus
Uncle Remus's picture

...that was pre-packed with sand.

Wed, 01/22/2014 - 15:04 | 4356058 hedgeless_horseman
hedgeless_horseman's picture



i'm down to reading glasses and toilet paper

You beat me.  I am only down to this:

  1. Knife
  2. Rx glasses
  3. Bible
  4. The Complete Works of Shakespeare (unabridged)
  5. Sidearm
  6. Toothbrush
  7. Pencils
  8. Notebook
Wed, 01/22/2014 - 15:05 | 4356121 Uncle Remus
Uncle Remus's picture

What, no copy of the constitution?

Wed, 01/22/2014 - 15:39 | 4356134 hedgeless_horseman
hedgeless_horseman's picture



It is really not necssary, thank you.

If I like my natural rights, I can keep my natural rights.  No receipt is required.

However, that is why I like to have a firearm.

Wed, 01/22/2014 - 15:46 | 4356283 Uncle Remus
Uncle Remus's picture

I see. Well, good luck with scaling that up.

Wed, 01/22/2014 - 21:53 | 4357530 Uncle Remus
Uncle Remus's picture

The devil is in the details of "like-minded" people.

Wed, 01/22/2014 - 17:21 | 4356699 GeorgeHayduke
GeorgeHayduke's picture

Good thinking on the Bible. Could be used for lighting fires or toilet paper, yet all bound together in one tight package.

Wed, 01/22/2014 - 13:50 | 4355862 insanelysane
insanelysane's picture

"The next boom will be 're-purposing' these malls... penal colonies, subsidized housing, indoor farms, who knows?"

Up the street from where I live is a public park that still has the remnants of the poor farm that once existed there.  The public poor farm was where the local homeless could live and work the land to grow food which they could eat or sell.  The malls of today could easily become poor farms of the present.

Wed, 01/22/2014 - 14:05 | 4355929 El Vaquero
El Vaquero's picture

While that might actually make sense, try to do that now in a lot of places and the place will get shut down for violating one government regulation or another.  You know, the rules must be followed because they're rules and provide some bureaucrat with a job.  Who gives a fuck if people starve, right? 

Wed, 01/22/2014 - 14:25 | 4356004 upWising
upWising's picture

Municipal Code Enforcement StasiCrats come down on "front yard farmers" with the Amercian equivalent of the wrath of Old Testament Gawd in a Pissed Off Mood NOW.

SURELY you are not suggesting such a regressive move as REMOVING Perfectly Good Asphalt Parking Lots (unused, but that is beside the point) to PLANT FOOD?  You would suggest that we ALLOW rain water to percolate "naturally" back into the aquifer free of parking lot run-off?  You would PROPOSE to do something so Subversive and UnAmercian, and I imagine you would do it WITHOUT an Environmental Impact Report as well!!

Obviously you just don't Love Amercia as much as General Growth Propeties (which owns dozens of "Exciting Shopping Destinations") loves Amercia.

Don't Forget :: "Amercia is Jesus' Favorite Country!" ©

Wed, 01/22/2014 - 15:22 | 4356185 donsluck
donsluck's picture

My god, dig up asphalt to grow food on polluted sub-soil. Ridiculous. It will stay a waste land.

Wed, 01/22/2014 - 16:16 | 4356418 Matt
Matt's picture

Raised beds in garden boxes seems the most practical way to recover the land. Much less effort than digging it all up, too.

Wed, 01/22/2014 - 18:11 | 4356846 SDShack
SDShack's picture

No, grow lights inside where it is nice and warm. Pot growers dream and necessary when weed is legalized across the country. Weed is going to be the new perfect big ag business in the USA because it will be Urban Ag. Hell, Monsanto is probably working on GM strains of it right now to corner the market.

Wed, 01/22/2014 - 20:51 | 4357324 FEDbuster
FEDbuster's picture

Maybe JCP can convert all those failing mall stores into giant indoor pot farms.  Turn the cosmetic counters into Hooka bars? 

Wed, 01/22/2014 - 14:15 | 4355972 insanelysane
Wed, 01/22/2014 - 14:27 | 4356008 TuPhat
TuPhat's picture

It wouldn't be very effective to grow food on asphalt parking lots.

Wed, 01/22/2014 - 16:15 | 4356422 7 of 15
7 of 15's picture

I tried once to grow a garden on formerly paved land. Essentially you have to dig a hole deep enough so water will drain and then refill the hole with 'new' dirt.  Otherwise it’s like growing in a bucket.

Apparently they use soil stabilizers (lime? Calcium Carbonate?) under the asphalt.

Wed, 01/22/2014 - 22:00 | 4357554 StychoKiller
StychoKiller's picture

Aquaponics FTW!!

Wed, 01/22/2014 - 14:05 | 4355925 Matt
Matt's picture

Repurposing, probably, although more likely in the form of mass squatting than organized government programs. Detention Centers? Maybe, I don't know how well those gate-fence things they pull across work. Also, if they have those foam ceiling tiles with a big crawl space overhead, even if the walls are concrete the place will be insecure. Would require a lot of renovation, I suspect.

Wed, 01/22/2014 - 15:50 | 4356299 JLee2027
JLee2027's picture

Everyone knows the next boom is alredy here. Apartments! and lots of them. No more houses, that was so...90's.

(Pssst. Coming soon a shed of your own on the trillionaires property w/low financable ground rent).

Wed, 01/22/2014 - 18:13 | 4356852 SDShack
SDShack's picture

Almost, empty retail malls will be FEMA camps in the New Feudal World Order. A cross between the Superdome in Katrina and Thunderdome.

Wed, 01/22/2014 - 16:37 | 4356527 logos5
logos5's picture

People were always disappointed with the answer they got from my father when they asked him how he made all his money... "By not spending it." Was his reply.

Wed, 01/22/2014 - 18:29 | 4356897 the tower
the tower's picture

I live in a small flat downtown, the money I save by not byung tons of crap I spend at sole proprietor shops, restaurants, bakers, and on quality products that last...

Wed, 01/22/2014 - 14:02 | 4355909 grunk
grunk's picture

Blues Brothers sequels.

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