Last Sunday, Forever 21 filed for bankruptcy, following months of rumors. The ubiquitous fast-fashion retailer plans to close up to 178 stores in the U.S., although some of those locations may stay open if landlords offer sufficient rent concessions.

Forever 21's bankruptcy adds to the pressure that mall-focused REITs have been facing from other retail bankruptcies and downsizing. What's unique about this case is that Forever 21 occupies a lot of square footage and is a meaningful rent-payer. By contrast, the department stores that have closed in recent years often paid very little rent (or owned their stores outright), while the in-line tenants that have filed for bankruptcy took up far less space than Forever 21.

The Forever 21 bankruptcy filing will impact the full spectrum of mall REITs, ranging from Taubman Centers (NYSE:TCO) and Macerich (NYSE:MAC) at the high end to CBL & Associates (NYSE:CBL) and Washington Prime Group (NYSE:WPG) at the low end, as well as Pennsylvania Real Estate Investment Trust (NYSE:PEI) in the middle. However, three of these REITs are likely to incur the most damage from Forever 21 closing stores and renegotiating rents.

Taubman Centers has the most exposure

Of all the mall REITs, Taubman Centers is the most dependent on Forever 21. As of June 30, Taubman reported that it had 17 Forever 21 stores spread across its 20 malls in the continental U.S., occupying a total of 490,310 square feet of space. That represents 4% of the REIT's total gross leasable area.

Unfortunately, 12 of those locations were on Forever 21's list of planned store closures. That means Taubman Centers is faced with an unenviable choice between seeing a huge amount of space in its malls become vacant near the end of this year or offering major rent concessions.

An interior shot of The Mall at Millenia

The Mall at Millenia is one of the premier malls where Forever 21 may close its store. Image source: Taubman Centers.

The good news is that many of the Taubman malls where Forever 21 is threatening to close stores are premier properties. These include Beverly Center in Los Angeles, the Mall at Short Hills in the New York City suburbs, the Mall at Millenia in Orlando, and International Plaza in Tampa, among others. These trophy properties have proven popular with emerging brands looking to establish a physical presence. As a result, while Taubman is likely to face significant pain in the short run, it should be able to find new tenants willing to pay at least as much as Forever 21, eventually.

CBL and Washington Prime can't afford this setback

Low- to mid-tier mall operators like CBL and Washington Prime have less exposure to Forever 21 than Taubman Centers. CBL lists Forever 21 as its No. 13 tenant in terms of revenue, contributing 1.11% of the REIT's annual revenue. Forever 21 operates 21 stores in its portfolio, occupying a total of 406,116 square feet of space. Washington Prime doesn't count Forever 21 among its top 10 non-anchor tenants, meaning that it gets no more than 1% of its base minimum rent from the fast-fashion giant.

Forever 21's list of potential store closures includes half a dozen CBL malls and eight Washington Prime properties. Both REITs own dozens of malls, and Washington Prime also owns a substantial collection of open-air shopping centers, so the number of Forever 21 stores on the chopping block is relatively small for both CBL and Washington Prime compared to the size of each company.

However, while the financial impact will be smaller than for Taubman Centers, the context is far different. Washington Prime expects comparable net operating income (NOI) for its core operating properties to fall about 3% this year. CBL's comparable NOI is on pace to plunge by about 7%.

Thus, both of these REITs are already hurting. Losing more rent from the Forever 21 bankruptcy will amplify their existing financial problems and make it even harder to pay for desperately needed redevelopment work to make their properties more attractive retail destinations.

The other REITs should be fine

The Forever 21 bankruptcy filing should be more manageable for PREIT and Macerich. Forever 21 accounts for 2% of PREIT's annual gross rent, but it plans to close only five of the 13 stores it operated at PREIT malls as of June 30. Three of these stores are at PREIT's three best malls. Two of those three properties are nearing the end of multiyear redevelopment projects, which will help with releasing the Forever 21 stores to new tenants at higher rents.

The other two Forever 21 stores from PREIT's portfolio that are potentially closing opened just last year and occupy about 9,000 and 11,000 square feet of space, respectively. It will be harder to backfill those spaces, but the headwind will be relatively insignificant compared to the tailwinds that will help PREIT in 2020.

The upper-level entrance to the Forever 21 store at Cherry Hill Mall

Forever 21 may close its stores at PREIT's top three malls, including this one at Cherry Hill Mall. Image source: Author.

Macerich gets an even greater percentage of its rent (2.5%) from Forever 21. About half of its 30 Forever 21 stores are at risk of closing due to the bankruptcy, including all but one of the eight Forever 21 locations that Macerich classifies as anchor tenants (which generally occupy at least 80,000 square feet).

That said, as Forever 21 vacates department store-like locations, Macerich will have an ability to subdivide those spaces for tenants that will pay higher rents. Sales per square foot exceeds $500 at all seven Macerich malls where Forever 21 "anchor" stores are slated to close -- and four of them have sales per square foot in excess of $650. This is a good indication that there will be strong demand for space at these properties.

As with Taubman Centers, the loss of so many Forever 21 stores will be a significant headwind for Macerich in the short run. However, unlike Taubman Centers, Macerich could benefit considerably from Forever 21's bankruptcy in the long run, as it will be able to recapture hundreds of thousands of square feet of space at highly desirable properties and repurpose that space for more lucrative tenants.