FTC's Look At SPG And GGP May Be Moot Now, But Federal Involvement In The Shopping Center Industry Has A Long History

This column of Strolling the Agora is from the May 17, 2010 issue of the twice-monthly SHOPPING CENTER DIGEST


There has been a substantial buzz in the industry about the possibilities of the Federal Trade Commission looking into Simon Property Group and its efforts to acquire General Growth Properties, the number two owner-developer in the industry regarding the size of its portfolio in malls. This issue, of course, is moot, since the bankruptcy court last week approved GGP’s choice of an $8.5 billion reorganization plan offered by Brookfield Asset Management.

Here is not the forum to analyze which of the two proposals would be better for the bankrupt owner-developer and its shareholders; David Simon has said his company is bowing out, ending the acquisition/merger effort and will not continue the fight.

Regarding the FTC, he discounted that as an issue, stating SPG owns only 3.5% of the 7 billion square feet of shopping center space in the US and “anti-trust authorities have consistently recognized the retail real estate industry is highly competitive and fragmented and is one of the only industries exempted from Hart-Scott-Rodino filing requirements [which require companies to submit merger plans before announcing the deal]. Tenants, whether they are discount retailers, manufacturers or otherwise, can and do lease retail space in a variety of locations.”

Wellllllllllllllllllll, yes and no, if you want to discuss some of the “fragments” of that 7 billion sq. ft. of space. If you eliminate the overwhelming bulk of shopping centers, the neighborhood strips and concentrate on the number of remaining projects, SPG owns or has an interest in 387 properties totaling some 263 million sq. ft. of retail space; GGP has over 200 malls totaling some 200 million sq. ft.

Back To The ‘70s

The FTC has examined our industry and the possibilities of restraint of trade dating back to the early ‘70s, mainly focusing on the dealmaking leverage and conflicts that could involve special agreements between landlords and key tenants. These early examinations centered on Tysons Corner and its anchors, against Gimbel Brothers, the industry’s leasing practices-- including the suit filed by the operator of a gift shop franchise against some leading owner-developers-- and the like. And in 1978, a small Pennsylvania supermarket chain brought an antitrust suit against a larger food operator that operated in PA,WV, and OH for trying to keep it out of a specific strip shopping center; in 1956 the lease had been amended to add a clause prohibiting the leasing of any part of Bon Aire Shopping Center to a chain supermarket that would compete with Thorofare.

And then, in 1989, Sears, Roebuck & Co filed a request to modify a ’77 consent order prohibiting it from using radius clauses, use clauses and easement agreements, especially those involving Homart Development Co—which was the shopping center development arm of the retail giant.

All of the cases involve what could be considered—by today’s operation—outmoded or obsolete. Though in the past, some high-end malls would try to prevent discounters or big-box users from becoming a tenant, because they “conflicted” with the main concept or retail direction of the project, today that point is almost meaningless. There are numerous high-end and fashion-oriented malls that include these types of tenants, and even value-oriented retailers.

And the use of radius clauses, so a tenant would not compete or siphon off sales from one store to another two miles down the road, may be considered quaint; even if the clause is included in a lease, it is not vigorously enforced by landlord or tenant. I remember speaking to one sports retailer who ignored this restriction to open in a nearby, new project, now the top mall in the market: “I’d much rather take that new location and, perhaps impact my sales at the older center, than let the new store go to a competitor who would hurt me more.”

Developers, Anchors And 3.5%

It’s interesting, also, that the major restraint of trade investigation into this shopping center industry began when a retailer was turned down from becoming a tenant in a high-end fashion mall. His consultant, shortly after, was appointed to the FTC; and soon after that was when the federal authorities began a major investigation into arrangements between mall landlords and the relationships they had with their anchors, mostly department stores.

Now, getting back to SPG and its 3.5%, across the board, concentrating only on that ratio without any quantification, it appears almost laughable that one landlord could have such influence that its decisions could constitute a restraint of trade.

However, if there’s a trade area with three or four malls, and two or three are owned by one company, there’s a different perspective regarding negotiating a lease between equals.

If you have a niche within the industry, say off-price and factory outlets or value-oriented centers--which may total some 300 projects--and one landlord has an extremely high percentage of these projects, it may become another issue.

SPG is the largest landlord in this “fragment” with some 45 Chelsea Premium Outlets; it expects to close soon on its planned acquisition of Prime Retail, which will add 22 or so more centers totaling some 8.2 million sq. ft. to its portfolio. The next largest landlord is Tanger Outlet Centers with 33 centers in 22 states.

According to some in the industry, SPG would control 80% of the top 50 of these projects.

The pending acquisition, it concedes, is now being reviewed by the FTC.

Whatever decision is reached, I'm certain it will result in much introspection and discussion in this shopping center/retail chain industry.

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