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Wrecking Balls to Hit the Malls?

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Just about a year ago, my Foolish colleague Todd Wenning and I went on a retail research trip to a nearby mall and proclaimed, "The mall is a ghost town." We were referring to consumer foot traffic, but consumers' new frugality is taking a serious toll overall. A Wall Street Journal article today discussed how the recession has turned many malls into literal ghost towns, and how this underlines the industry's continuing pain.

The WSJ article described many malls as "reduced to largely vacant shells" as economic fallout ravages the industry and many retailers close their doors in many malls. "Dead malls" -- the worst hit, many of which were struggling from competition or demographic shifts even before the recession hit -- are expected to increase by 100 by year end. U.S. malls overall experienced a daunting 6.5% drop in their tenants' same-store sales in the last year, according to Green Street Advisors.

Simon Property Group (NYSE: SPG  ) was pointed to as a major victim, as it has the largest number of mall locations, but let's not forget that the recent bankruptcy of General Growth Properties not only underlined the problems facing mall operators but also hinted that commercial real estate debt defaults are yet another serious pain about to befall the overall economy.

Americans have long loved their malls, but I can't help but say, maybe common sense simply says we could use fewer of them; maybe we never needed all these malls to begin with. Over-expansion of retail was one of the outcomes of our debt-fueled bubble, helped along by soaring housing prices and overuse of cards with the logos of Visa (NYSE: V  ) , MasterCard (NYSE: MC  ) , American Express (NYSE: AXP  ) , and Discover (NYSE: DF  ) . And of course, many mall operators simply took on way too much debt to finance this expansion, once again emblematic of the reasons why our economy's in a mess.

What will result in many store closures, or even retailer or mall failures, is of course all part of a correction, which could even be called a return to sanity if you're not too hooked on nostalgia. If nobody wants or needs the Sears Holdings (Nasdaq: SHLD  ) , J.C. Penney (NYSE: JCP  ) , Borders, or one of the five RadioShacks at this or that mall, then basically, the market is sending a message. See you later. Some retailers need to thin the herd of stores; some may face actual extinction.

While investors might want to consider looking for strong, debt-free retailers to invest in, let's remember that the weak ones are dangerous; they are likely fashion casualties or perhaps should be on death watch. Pondering the proliferation of seriously ailing malls underlines the intense headwinds buffeting the entire industry, and only the strong will survive.

American Express, Discover Financial Services, and Sears Holdings are Motley Fool Inside Value selections. The Fool owns shares of American Express. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (10)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 01, 2009, at 4:33 PM, sharko01 wrote:

    Have you been following GGPs story in bankruptcy? Reading the details? Doesn't sound like it.

  • Report this Comment On June 03, 2009, at 1:14 PM, golftee6 wrote:

    This article is largely a lazily written rehash of old "news". In spite of dire predictions last January that "thousands" of malls would close all over the nation, that has not happened. Malls that are 35-40 years old in declining neighborhoods are in terrible shape if no money has ever been spent on rehab before now! But there are plenty of malls across the US that are doing OK. See above, and get familiar with the truth about GGP's bankruptcy. No question that retail is off. So is everything else. Look for retailers with great locations and merchandising vision.

  • Report this Comment On June 05, 2009, at 3:53 PM, BTShine wrote:

    Sharko01 is right. It doesn't sound like you know anything about the General Growth Properties bankruptcy filing. General Growth's business is UP this year! They are filing for bankruptcy because they couldn't re-finance their debt, even though their business has improved.

    The closing of malls hasn't hurt GGP, it is the collapse of the credit markets.

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