GLG News by Former C-Level Executives in the Real Estate Council in Member Programs

Sam ChandanPresident and Chief EconomistChandan Economics

The Bankruptcy of GGP and the Prognosis for Retail REIT Debt Management

April 27, 2009

Analysis of:Mall operator General Growth Properties files for bankruptcy protection | www.dallasnews.com

As in the case of GGP’s bankruptcy, debt structure issues will dominate amongst REIT default drivers over the course of the commercial real estate market adjustment. Defaults will exert downward pressure on property prices but will also facilitate an increase in transaction volumes by forcing sellers’ prices to meet buyers’ expectation of adjustments.  Weakening fundamentals will coincide with debt-related distress during the process of price adjustment. Occupancy within GGP’s mall portfolio fell by a relatively modest 130 basis points between year-end 2007 and 2008. But a combination of bankruptcies, a drop in renewal rates on expiring leases, and violations of co-tenancy covenants will undercut mall fundamentals to a greater degree in 2009 than was observed in 2008.  Going forward, the effective operation and management of space will prove to be of critical importance for REITs with lower leverage.

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