America's Most Endangered Malls--By Rick Newman

June 26, 2009

Birmingham's Century Plaza mall was a consumer mecca when it opened in 1971, drawing shoppers from outlying suburbs and even from other states. Over the years, however, people moved outward from central Birmingham, and new shopping centers sprouted around them. Sales at Century Plaza declined. Three of the mall's four big "anchor" tenants eventually left, and smaller retailers followed. By 2008, Century Plaza was a shadowy hulk with more shuttered stores than open ones. Then the last anchor tenant, Sears, announced it was leaving. The mall finally closed for good in early June.

[Slideshow: America's Most Endangered Malls]

Malls have a natural lifespan, as population centers shift, architecture evolves, and shopping habits change. But a sharp recession is clearly accelerating the demise of vulnerable retailers—and some of the shopping centers they inhabit. Plunging sales are one obvious reason. Many retailers are also saddled with heavy debt taken on in recent years to fund aggressive growth. And the credit crunch has made cash scarce for firms that need it most.

Those tough conditions have already driven retailers like Circuit City, Linens 'N Things, and Steve & Barry's out of business. Other chains are closing stores and slashing costs as they fight to survive. General Growth Properties, a Chicago firm that operates more than 200 malls—and owns the remnants of Century Plaza—declared bankruptcy in April and is working on a restructuring plan.

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The churn is transforming America's retail landscape. "During times like this, good malls tend to get better and bad malls tend to get worse," says Steve Sterrett, chief financial officer of Simon Property Group, the nation's largest mall operator. The first sign of trouble is often the departure of department stores and other anchor tenants, especially if those spaces stay vacant. High-quality, name-brand merchants often follow, with discounters—or nobody—replacing them. Shoppers sense the ennui, and gravitate toward malls that feel more vibrant, which only deepens the distress at troubled properties. By some estimates, about 10 percent of the America's malls could close within the next few years.

To gauge which malls are in trouble, U.S. News analyzed data from Green Street Advisors, an investment research firm in Newport Beach, Calif., that specializes in publicly owned real estate companies. Their data includes occupancy rates, sales per square foot, and quality grades for about 650 of America's biggest shopping centers. The average property in the data set has sales of about $420 per square foot and an occupancy rate of 92 percent, good for an A- grade.

[See how to tell if a mall is in trouble.]

The malls at the bottom of the list earn grades of C- or D, with falling sales at many stores and a high proportion of discount retailers that tend to draw the least lucrative consumers. As a rule of thumb, malls with sales of $250 per square foot or lower are struggling. "It's hard for many retailers to be profitable at $250," says Jim Sullivan of Green Street. And nine out of 10 malls at the bottom of Green Street's list have sales at or below that threshold.

The data we used doesn't cover strip malls and other shopping centers owned by private firms, which tend to be smaller, less profitable, and more vulnerable to a bad economy than regional malls. But the following 10 malls still represent bleak snapshots of some of the weakest spots in the nation's retail economy.

Century III Mall , Pittsburgh, Pa. (Occupancy rate: 70 percent; sales per square foot: $200*). About 30 of the 120 stores at this suburban Pittsburgh mall have closed recently, including anchor tenant Steve & Barry's and KB Toys (both of which have declared bankruptcy), Old Navy, Ruby Tuesday's, and Macy's Furniture Outlet. The 30-year-old complex targets value shoppers but competes with nearby discounters like Wal-Mart and Kohl's. Other area malls with more upscale stores are doing better. Century's owner, Simon Property Group, may be looking to sell Century III.

Chambersburg Mall, Chambersburg, Pa. (62 percent; $234). Sales have held steady over the past year, but a bucolic location 60 miles southwest of Harrisburg makes this sleepy mall a perennial underperformer. K.B. Toys, Value City, and B. Moss closed their stores after declaring bankruptcy. Newcomers include discounters like Bolton's and Burlington Coat Factory, which are likely to generate little excitement.

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Crossroads Mall, Omaha, Neb. (68 percent; $200*). Shoppers are fleeing this 50-year-old mall in central Omaha for suburban shopping centers that feel safer and more vibrant. The departure of Dillard's in 2008 left one of three anchor slots vacant. The Zales and Gordon's jewelry chains are also gone, along with Gap and most of the mall's food-court restaurants. According to press reports, owner Simon Property Group recently put the property up for sale. A buyer could try to resuscitate the mall or convert it to a different kind of retail or commercial complex.

Hickory Hollow Mall, Nashville, Tenn. (82 percent; $187). Dillard's has left, and other departed tenants include Linens 'N Things and Steve & Barry's, two of the biggest casualties of the recession. Two of four anchor slots are vacant, and the theater recently switched from first-run movies to late-run discount flicks. With a lack of retailers, the mall may convert some of its space to office use. One new tenant: the local police, who recently opened a recruiting station at the mall.

Highland Mall, Austin, Tex. (61 percent; $150*). While gleaming new stores have been springing up in some parts of Austin, this 38-year-old mall along I-35 has struggled to keep stores open—and avoid embarrassing controversies. Anchor JCPenney left in 2006, and this year Dillard's sued the mall's owners, claiming they let the mall become a "ghost town." The owners countersued, claiming that the suit is part of a scheme to help Dillard's get out of its lease early.

Palm Beach Mall, West Palm Beach, Fla. (82 percent; $250*). A year ago, the plan was to renovate this fading 42-year-old property. But that changed with the recession. Anchor tenants Dillard's and Macy's bolted within the last year, and in April, the mall's owners defaulted on a big bank payment, triggering a foreclosure lawsuit that could force the sale of the property. The power company even threatened to shut off the mall's electricity, but the bill was paid at the last minute. While remaining tenants like Sears and JC Penney await the outcome of litigation, other nearby malls are adding space and gaining customers.

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SouthPark Mall , Moline, Ill. (84 percent; $225). The owners spent a couple of years trying to sell this Quad Cities landmark, built in 1974, but they finally gave up late last year. Local officials would like to see the aging property converted to a more modern "lifestyle mall" with boutiques, lounging areas, and an upscale ambience. But modest local incomes probably can't support the major investment that would require. For now, the only upgrades at SouthPark are the construction of a few strip centers on "outlots" surrounding the mall, to be occupied by cheap restaurants and local service businesses.

Southridge Mall, Des Moines, Iowa. (84 percent; $168). The 2007 arrival of Steve & Barry's was supposed to mark a revival for this 34-year-old complex on Des Moines's South Side, which has been losing shoppers to more gentrified suburban malls. Then the discounter went bankrupt and closed its stores. The mall's owners have been trying to sell the property, and city officials have been working on ways to revitalize the entire area. They better hurry: At $168 per square foot, Southridge's sales are among the lowest for big malls.

Towne Mall, Franklin, Ohio. (49 percent; $207). This aging structure between Cincinnati and Dayton has been troubled for years, as the owner, CBL & Associates, and local officials have deliberated over whether to tear it down and build something more modern. Towne Mall has one of the highest vacancy rates of any operating mall, with more closed stores than open ones. A decision on the mall's fate is supposed to come soon.

Washington Crown Center , Washington, Pa. (70 percent; $265). Three of its biggest retailers—Macy's, Bon-Ton, and Gander Mountain—have suffered deep losses as consumers have cut spending. The mall's owner, Pennsylvania Real Estate Investment Trust, is revamping some of its properties—but not Washington Crown Centre, one of the weakest malls in its portfolio. PREIT could end up selling some of its subpar properties, which leaves this mall vulnerable.

* Where noted with an asterisk, figures are Green Street estimates.