Retail recession spreads to wealthier parts of Southland

When storefronts become vacant, the investors or landlords who own the shopping centers collect less money in rent. Moreover, the retail difficulties are giving a bargaining edge to those tenants who've been able to hang on, and many have been negotiating cheaper leases. In some cases, landlords in the Los Angeles area have dropped rents between 20% and 40%, brokers said.

"Requests for rent reductions came piling in for all our landlords, like ants in an ant farm," said Scott Kaplan, a senior managing director at CB Richard Ellis.

With their rental income falling, some landlords are having trouble paying their mortgages and may face foreclosure. Banks have been reluctant to take over malls so far, but that patience may end soon, industry observers said.

"We're in the beginning stages of banks taking back assets," Kaplan said. "We'll see a lot of that occurring between June and December."

In addition to reduced income from rents, many owners of retail space are finding that -- like homeowners -- the value of their property has dropped considerably.

Those who bought their properties during the recent boom may be upside down on their mortgages, industry observers said.

Although many banks are still trying to avoid foreclosing, some are trying to improve their bottom lines by calling for landlords to put in more equity if they want to keep their loans, Kaplan said.

"Then they have a staring match to see who flinches," he said.

He predicted that commercial owners and lenders would soon come to terms with what property is worth now, and that property would be re-priced downward through foreclosures and sales.

But that will take some time, as long as 12 to 18 months, according to some analysts.

"There is a huge volume of stuff in trouble and only a tiny bit of it resolved," said analyst Peter Slatin of Real Capital Analytics.

Meanwhile, empty storefronts are a growing nationwide trend, said economist Bob Bach of brokerage Grubb & Ellis. "Vacancy rates are rising rapidly."

One result, Bach said, is that landlords have recently been willing to lease to tenants they might have avoided in the past as not up to snuff or not appropriate for the center's mix of businesses.

Examples include dentists, chiropractors, charter schools and "affordable pampering" facilities such as massage therapy clinics, said analyst Alexander Goldfarb of Sandler O'Neill & Partners. Those types of businesses are more likely to end up in weaker malls, he said.