Life Plaza Center in San Gabriel used to teem with diners heading to Green Village, a Chinese restaurant in the middle of the horseshoe-shaped mall on Valley Boulevard.
But after the eatery closed five months ago, the 7,500- square-foot space remained vacant. With no tenants stepping forward and fewer customers clogging the parking lot, the plaza is quiet, with a curiously dark core. It's a scene repeated in various forms throughout the region, as the economic crash that started rolling through single-family housing more than a year ago begins to hit shopping centers, turning what had been a residential phenomenon into one that threatens commercial real estate as well. Business is so bad that an increasing number of retailers are calling it quits -- without waiting to see whether money can be made as the Christmas season gets underway.
The department-store chain Mervyns closed in October -- at about the same time Linens 'n Things Inc. and Shoe Pavilion Inc. launched going-out-of-business sales. This month, Circuit City Stores Inc. filed for Chapter 11 bankruptcy protection just days after announcing it would close 155 underperforming electronics stores and seek lower rents at others.  For property owners, the loss of tenants means more than a reduction in the revenue that is collected from rents. If one store closes, customers are less attracted to the center overall, and the losses can snowball. Whereas in previous years it was easy to find new tenants, now they are scarce. And as the property owners find themselves getting in trouble, their typical recourses -- to sell the building or refinance it -- are also stymied by the stuck economy. At Life Plaza Center, the lack of interest from potential new tenants has surprised the plaza's management. Located between Del Mar Avenue and San Gabriel Boulevard, the mall is situated in the heart of a long-thriving ethnic Chinese community. Potential tenants used to abound. "We were charging $2.75 a square foot, but if we can get $1.75 for it, we'd be very lucky now," said Art Ko, a leasing agent for STC Management. "It's hard to even grasp what's a fair market price now. Everything is up in the air. We've had many deals where people just walked away the last minute. It's a buyer's market." Ko's company manages dozens of properties in Los Angeles and Orange counties. In recent months, they've experienced a rise in delinquent renters. One plaza in Rowland Heights has been hampered by a closure, an upcoming eviction and a business for sale. "It was at 100% occupancy just half a year ago," Ko said. A bad situation threatens to get worse after the holidays.Christmas is always a key driver of merchants' financial success, but this year it could mean life and death for many stores, analysts say. Struggling businesses typically hang on through the holiday and then evaluate their financial position, said Malachy Kavanagh, a spokesman for the International Council of Shopping Centers, an industry trade group. In most economically slow years, large retailers can cover for a Christmas shortfall with loans from their longtime lenders. But the credit crunch is keeping bankers on the sidelines, and even big players are having trouble getting the financial help they need. If Christmas doesn't deliver the usual windfall for merchants, the pressure on landlords to rewrite lease agreements and reduce rents in 2009 could become intense, said Stan Ross, chairman of the USC Lusk Center for Real Estate. That could put some shopping center owners in jeopardy with their lenders, especially if they can't find replacement tenants for those that leave. "The worst thing for a retail center is to have a lot of dark stores," said Ross, because it makes the center a depressing place to shop and can speed its demise. Fewer customers visit and more stores turn out the lights. "There is a domino effect," he said. Far from lining up to grab available retail spots at any price, merchants from big chains to small mom-and-pops are asking for reduced rents and threatening to go out of business or move to cheaper digs if their landlords don't acquiesce. That's a turnaround from three years ago, when department store mergers opened up large blocks of space but didn't cause much panic with mall managers, which easily replaced them with other tenants. Now, however, leasing at many local malls is already grinding to a near-standstill, said Mike Jensen, a broker with Pacific Retail Partners in Long Beach. That's especially true in communities that had experienced the most extreme highs and lows in the housing market. At a mall in Moreno Valley, for example, PetSmart and Staples signed leases to move in but bailed out before doing so. Macerich Co., a national shopping center chain that until recently had 43 Mervyns stores as tenants, is scrambling to find replacements.
The Santa Monica-based company is also fielding requests from tenants that want lower rents.Randy Brant, Macerich's head of real estate, said that the chain knew Mervyns was in trouble when it agreed to buy the properties late last year because Macerich wanted the real estate, but it figured that new tenants would be easily found.
But in today's market, replacing 43 large stores promises to be challenging. With fewer big retailers out looking for space, Brant said Macerich might try splitting the buildings up and leasing the large former Mervyns stores to several tenants instead of just one. Big mall chains such as Macerich and Westfield usually have the resources to endure economic downturns better than small local shopping center owners, industry observers say, but being big isn't always enough. General Growth Properties Inc., owner of the Glendale Galleria and more than 200 other malls, has seen the value of its stock decline about 90% in the last three months and said this month that it might default on billions of dollars' worth of debt it took on in an acquisition spree.
And why not go on a spree? In those days, consumers were buying and retailers were willing to pay almost anything to rent a choice space. "We'd have one space and three tenants who wanted it," said Jensen of Pacific Retail Partners. As the economy slowed, however, some landlords miscalculated, raising rents above what their tenants could pay. Two and a half years ago, Connie and Micheal Edwards opened a small gymnasium for children in a Studio City shopping center. The mall was sold and the new owners made improvements and then raised rents about 20%. The Edwardses were already struggling, and the rent increase put the business in the red. "We had invested almost everything we had into it and it was bleeding freely," Micheal Edwards said.
He asked the landlord for a rent reduction, hoping he could bring the gym to profitability. The landlord balked and the gym closed. More than a year later, the ground floor space remains empty -- its glass storefront covered by white paper and a Lease sign. "This building has a lot of vacancies," said Amy Kriegel, owner of a dance studio for children on the second floor of the shopping center. "It makes me think I should get a break in rent." Dodging children rushing through the door of her business, Creation Station, she said she hoped she had enough loyal clients to combat a ull in visitors to the plaza."I think it's the economy," Kriegel said.