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Simon Property Group's (SPG) fiefdom expands greatly in the retail real estate industry if its $10 billion bid for insolvent General Growth Properties succeeds. But the mall landlord's ability to wield significantly more power over tenants on rent and lease negotiations is up for debate.

The nation's largest mall owner and real-estate investment trust is positioning to takeover its biggest rival General Growth, potentially placing almost 50% of the nation's regional malls under its control. This entrenches Simon's influence, but the scope is unclear.

Some industry experts say it is going put retailers in an uncomfortable position knowing they have one huge developer to negotiate deals. A mall owner with hundreds of locations can pressure retailers to open stores in struggling malls as a condition of getting space in its best-quality properties.

"Anybody that has that much clout is not necessarily good for the business. However...retailers are not going to be forced into situations any longer like they were in the past (by going) into unproductive properties or being leveraged into properties where they can't be successful," said Greg Maloney, President and Chief Executive of Jones Lang LaSalle Americas Retail.

"Larger developers and managers feel very good about having a large portfolio because we can bring in a retailer such as a Gap or an Abercrombie & Fitch and show them multiple properties at one time versus smaller developers where they have to go around and have a lot different conversations. From that stand point...it's going to make it easy," he said.

The deal, if accepted by General Growth's board and approved by its creditors and U.S. Bankruptcy court, would combine two of the largest and oldest mall owners in the U.S. into a colossus with 550 malls--at least a third of the entire U.S. market.

"Even a relatively large combined Simon/General Growth landlord will have a somewhat limited ability to dictate rents or demand that tenants lease space in other poorer performing malls," said Ryan Severino an economist at Reis, Inc.

He said for national tenants with stores in a large number of malls, the combined company could exert some influence over lease terms, but that would still be driven primarily by retailers demand to locate within a particular mall.

"So while Simon/General Growth might be able to have some influence on the lease rates at the margin, they will not be able to purely dictate lease rates and locations to potential or existing tenants," Severino said.

Simon's bid for General Growth comes at a time when mall REITs had been grappling with a retail industry hammered by steep declines in consumer spending and woes in the broader commercial property market as values plummet and foreclosures rise amid a credit crunch and recession. Landlords have been under pressure to offer rent relief and other concessions to keep desired tenants, and signed leases with discount retailers.

Underscoring the pain, during the fourth quarter vacancies rose by 20 basis points to hit 8.8%, according to Reis, the highest level on record since the firm began tracking such data in 2000. Asking rents for regional fell by 0.4% in the fourth quarter, marking five consecutive quarters of decline since the fourth quarter of 2008, the firm said.

Jones Lang's Maloney said there have always been certain developers to push rents because of their product type. Taubman Centers Inc. (TCO) "is a great example of that," he said, noting they have few properties, but are highly productive in luxury malls.

"They've always pushed rents in all of their properties and kept occupancies down," he said. "(Simon will) try to push (rents) but everybody else tries to push it anyway."

There could also be some anti-trust implications by merging the two largest mall owners in the U.S.

"The result will depend upon whether Simon will be able to avail itself of what is known of the failing firm defense," said Brian A. Weinberger, an attorney at Buchalter Nemer.

He said that would require the company to show, among other things, that there are no practical alternatives to the proposed merger which would save General Growth.

"If there are other bidders out there, that may be tough," sell, Weinberger said.

-By A.D. Pruitt, Dow Jones Newswires; 212-416-2197 angela.pruitt@dowjones.com

 (Karen Talley and Kris Hudson from the Wall Street Journal contributed to this report) 
 

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