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Galleria more likely to be affected by economy than corporate woes

This article first appeared in the St. Louis Beacon, Dec. 4, 2008 - The Saint Louis Galleria's corporate parent, Chicago-based General Growth Properties, is on the brink of bankruptcy, prompting company leaders to offer their portfolio of 200 malls – in part or en masse – for sale.

And if that's not worrisome enough for the Galleria these days, as the critical holiday shopping season moves into full swing, the sprawling Richmond Heights property faces even more pressing issues: Whether its retail tenants will be left standing after what's expected to be a dismal holiday spending season, and the extent to which the re-opening of a nearby stretch of I-64 will help supply it with customers, preferably the deep-pocketed kind.

The Bankruptcy Question

General Growth Properties' financial problems, not to mention the stalled economy, seemed a long way from the mall's busy atrium and crowded parking lot one recent weekday. To shopper Lisa Main, of Clayton, it was hard to believe that the mall's corporate parent is teetering on the edge of bankruptcy after compiling a crushing amount of increasingly expensive debt. "How could this place lose money?" asked an incredulous Main, 54, as she loaded four Dillard's bags into the trunk of her Audi. 

GGP, the nation's second-largest mall developer with more than 200 properties, is racing to pay off more than $1 billion of debt by the end of this year. As its lenders issue extensions, Morgan Stanley recently took a 5 percent stake in the company, and Pershing Square Capital Management took 7.5 percent last month. GGP executives have said they'll put any of their malls on the block to generate cash— or all of them.

That could mean the Galleria, which sprang up in the 1980s on the site of the former Westroads Shopping Center, could get a new owner, said Shawn Barnes, a St. Louis-based analyst with Edward Jones who follows Real Estate Investment Trusts (REITs), a segment of the economy that includes GGP.

But since the Galleria is widely viewed by the industry as successful, set amid prosperous neighborhoods that, under normal circumstances, provide a regular stream of well-heeled consumers, shoppers won't likely see any major changes to it even if it changes hands, Barnes said.

"The issue with GGP has to do with the financing of the corporation, not with the performance of its malls," he said. "Making drastic changes to (the Galleria) probably would not be a good use of capital, (because) the mall is performing well."

The scheduled addition of Nordstrom department store in the spring of 2010 will only add to its value, Barnes said.

GGP spokesman Jim Graham tried to assure St. Louis shoppers that it will continue to be "business as usual" at the Galleria. He said shoppers in St. Louis won't notice any changes.

"The Saint Louis Galleria is a wonderful place to shop and visit, and that won't change as we work through our corporate issues," Graham said.

The Spending Question

Whoever owns the mall faces a slump in consumer spending. Holiday shoppers aren't buying as much as they did last year, according to the data available so far on this year's holiday season, by far the most critical weeks of the year for retailers. The International Council of Shopping Centers predicts holiday retail spending will edge up a tiny 1 percent this year compared to last, the lowest increase since 2002, said Erin Hershkowitz, a spokeswoman for the trade group.

Expected to be hardest hit: upscale retailers, the likes of which rent space from the Galleria and other malls. Macy's, for example, lost $44 million in the third quarter, and company leaders said they expect holiday sales to be weak, too.

BankruptcyData.com lists 24 major retail bankruptcies this year, up from seven in 2007. Already, non-Galleria retailers including Value City Department Stores, Steve & Barry's and Circuit City have filed for bankruptcy protection. In addition, Linens 'n Things has filed for bankruptcy and is closing stores, including the one facing the Galleria's north parking lot.

Shutered stores are bad news to any mall, since REITs such as GGP generate their earnings from the leases their tenants sign, said Barnes of Edward Jones. Closed stores at a mall mean lost revenue.

But so far, the Galleria is relatively strong on that front, as well, said Barnes. A recent walking survey of the sprawling mall found that only two out of about 122 shop-front spaces were vacant, suggesting what to Barnes is a healthy occupancy rate. Earl Dorsett, the mall's general manager, confirmed the two empty slots, and referred any questions regarding GGP to the corporate headquarters.

As far as he's concerned, the Galleria is gearing up for a "prosperous holiday season," Dorsett said between conference calls recently from his office at the mall, while across the atrium, workers used a small tractor with a mechanical lift to put the finishing touches atop a giant Christmas tree. "For us, it's business as usual," he said.

The Highway Question

But business as usual can't come until the major artery funneling traffic to the mall is re-opened. That is expected to happen on Dec. 15, when I-64 between Ballas Road and I-170 is scheduled to open again.

"It can only help," said Dorsett. "It will be a positive." The stretch of I-64 was closed last January as part of the massive reconstruction project, effectively clogging a major route of shopping traffic to the mall from west St. Louis County.

Once traffic patterns return to pre-construction levels, the re-opened stretch of highway will funnel around 30,000 cars daily to the I-170 exit at Brentwood Boulevard, near the Galleria, from eastbound I-64, said Linda Wilson, spokeswoman for the Missouri Department of Transportation.

"But I can't say that those numbers will happen on opening day," Wilson said. "That would be optimistic," since traffic on I-64 will be closed from I-170 to Kingshighway starting the same day.

"But what's positive is that, once traffic hits those previous levels, those are 30,000 cars getting off the highway and into Richmond Heights and Clayton," she said. "That's a positive." 

Susan Skiles Luke is a freelance writer. 

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