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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.