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October 15, 2009 – It seems like news headlines report daily about bankruptcies in the retail industry. What, exactly, is the fallout? This and other “tough” questions – including those asking about which landlords and tenants are most susceptible, and the impact on shopping centers – are important to address.

Regarding susceptibility, level of leverage is a key factor in the ability of both retail tenants and landlords to weather the current economic conditions. Tenants that had recently gone through a leveraged buyout likely have high debt levels that seemed justified by rosy projections of future sales growth but left little margin for error. Companies like Linens N’ Things and Drug Fair paid the price when the economy turned so suddenly and dramatically.

The situation is similar on the landlord side, with General Growth Properties as the highest profile example. The company took on a great deal of debt when it acquired Rouse. Some of this financing matured as lenders were turning off the funding spigot.

So how do bankruptcies impact shopping centers? Properties that enjoy great locations, demographics and strong leasing histories will continue to thrive regardless of economic ups and downs. Yet at other centers, the loss of an anchor or two will have a major impact on the balance of the tenants. Additionally, tenants with co-tenancy clauses tied to an anchor may have the right to lower rents until the space is refilled. The result is a significant impact on cash flow. Still, it is important to remember that not every retailer bankruptcy translates into the loss of a tenant. Many companies are simply reorganizing to shed debt and will remain in business.

Bankruptcies on the landlord side impact shopping centers with varying degrees. In some centers, tenants and shoppers likely will not notice much difference operationally. Yet in many cases, the time leading up to a bankruptcy is most likely accompanied by a shortage of cash flow. Maintenance and needed upgrades may suffer.

In other cases, the landlord may be out of the picture after turning the property back over to the lender in a foreclosure situation or to a bankruptcy trustee. This actually can have a positive effect on the center in terms of stabilization. The entity taking over responsibility most certainly does not want to see the property fall apart and will likely invest, as needed, to protect the value of the asset.

Looking at the big picture, this “weeding out” in our industry is creating some notable opportunities. Lower property values translate to attractive acquisitions for owners with significant capital. Additionally, lower rents are opening doors for tenants to take advantage of opportunities that enable them to expand, open new locations or relocate existing stores to better centers.

The current environment has created an economic adjustment that is ongoing, and we likely will see additional bankruptcies and more resulting vacancies through the remainder of this year. However, we are seeing a growing number of positive signs – in the economy in general and in retail in particular. We are signing more new leases, as well as renewals, expansions and exercised options. We just have to remember that real estate has always been cyclical and that the down portion of that cycle always ends.