Retail resurrection

Retail REIT General Growth has collapsed, and private equity real estate is best positioned to pick up the pieces.

It was the most anticipated bankruptcy of the past year. Yet despite the certainty that General Growth would eventually succumb to its $27 billion debt load, the retailers’ decision to file for bankruptcy protection yesterday still left the commercial real estate industry in a state of flux.

As the biggest real estate failure in US history, General Growth’s bankruptcy is emblematic of the enormous pressures facing property investors as they struggle to refinance maturing debt.

Indeed, General Growth’s bankruptcy is likely to mark the start of an increasing number of commercial mortgage defaults, with more than $800 million of commercial loans set to mature over the next years, according to real estate research firm, Foresight Analytics.

However, despite highlighting the troubles potentially facing commercial real estate, General Growth’s bankruptcy also has some upside, not least for private equity real estate firms.

General Growth was the US’ second largest mall owner, with more than 200 shopping centres in the US, including valuable retail assets such as Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston.

As part of the bankruptcy filing, General Growth sought protection from its creditors along with 158 of its malls. Although little is expected to happen over the next two to three months while secured and unsecured creditors pick over General Growth’s bankruptcy restructuring plan, industry professionals predict the bankruptcy filing will lead to sales of many of the REIT’s assets.

But, contrary to predictions, the firms most ready to take advantage of those sales might not be the country’s larger real estate investment trusts, such as Simon Property Group and Westfield Group. It could be private equity real estate firms.

The REIT industry lost more than 37 percent of its value in 2008 alone, according to the National Association of Real Estate Investment Trust, on top of losses of 17 percent in 2007. Many real estate investment trusts are concentrating on shoring up their own balance sheets, with little surplus capital to spare.

Steve Plenge, managing principal of retail investment firm Pacific Retail Capital Partners, told PERE the collapse of General Growth could also mark a sea change in the ownership of retail real estate. REITs, particularly those still run by the founding families, have had a stranglehold over the commercial retail sector.

However, the bankruptcy of General Growth could mark the start of a new era, one with greater competition and innovation. “This is going to be a great time for private equity real estate but I also think it will be good for the industry as well in the long run.”