March 16 (Bloomberg) -- There’s little relief in store for investors in U.S. shopping center and mall landlords even after the shares plummeted 80 percent from their February 2007 highs.

“REITs are cheap but they’re going to continue to be cheap,” said Marc Halle, managing director of Prudential Real Estate Investors in Parsippany, New Jersey, whose firm manages about $32.5 billion in real estate assets. “We’re going to see increased corporate bankruptcies and continued unemployment for the next few months.”

U.S. mall owners are coming off their worst-ever year of stock market losses as consumers cut spending and retailers shut stores. Vacancies at malls and shopping centers approached 10- year highs in the fourth quarter and will rise further, according to New York property research firm Reis Inc. More than 200,000 store closures are projected for this year by Howard Davidowitz, chairman of New York-based retail consulting and investment banking firm Davidowitz & Associates Inc.

“Thousands of shopping centers will close,” Davidowitz said in an interview. “It’s a debacle.”

The global credit crisis has eroded retail profits worldwide and put REITs including General Growth Properties Inc. near bankruptcy as they sell assets and negotiate with lenders.

‘Solvent Company’

Hedge fund manager William Ackman said today he may join the board of General Growth and that he expects the owner of more than 200 malls in 44 U.S. states to file for bankruptcy “imminently,” according to a Bloomberg Television interview.

“This is a solvent company with a liquidity problem,” said Ackman, who heads Pershing Square Capital Management LP. He said his company has acquired stakes that could give it 25 percent of Chicago-based General Growth and advocates a reorganization over liquidation. The latter would be “a disaster for the entire REIT industry,” Ackman said.

Australian developers Westfield Group, Centro Properties Group and Lend Lease Corp. in February reported $3.4 billion of losses as property values and retail sales plunged. Westfield, the world’s biggest shopping center developer by market value, last year cut operating hours at most of its 55 U.S. malls and sold shares to cut debt. Centro has ceded control to its bankers.

The Bloomberg REIT Retail Index of 27 U.S. companies, including Simon Property Group Inc., Kimco Realty Corp. and Taubman Centers Inc., sank to a record low of 101.18 on March 6 and had rebounded 32 percent through March 13. In February 2007, it peaked at 610.39 as cheap credit fueled a takeover frenzy.

Index Falls

The retail REIT index today fell 11.16, or 8 percent, to 122.79, the biggest drop in two weeks. The index fell 69 percent during the past year, compared with 41 percent for the Standard & Poor’s 500 Index, a benchmark for large U.S. companies.

A sustained recovery in retail sales is unlikely until later in the year because of mounting unemployment and falling home and stock values. February retail sales were buoyed by stores discounting to get rid of surplus inventory, said Roger Kubarych, chief U.S. economist at UniCredit Global Research in New York, in a Bloomberg Television interview.

“In order to have a sustained increase in personal consumption, wealth has to go up,” Kubarych said.

Simon Property is the largest U.S. mall owner and the biggest company in the Bloomberg Retail REIT Index by market value. One Simon property, Northgate in Seattle, was dubbed “America’s First Mall” after it opened in 1950.

Cancelled Store Plan

Seattle-based developer TRF Pacific LLC sued Whole Foods Market Inc. last year after the supermarket chain canceled plans to open a 60,000 square-foot store in the Interbay Urban Center, located north of downtown Seattle between two of the city’s wealthiest neighborhoods, Queen Anne and Magnolia. Whole Foods in January agreed to open a smaller store, of about 40,000 square feet, and is trying to sublet the rest of the space, said Whole Foods spokeswoman Vicki Foley.

A hobby shop called Science, Art and More in Seattle’s Roosevelt District, one of the city’s retail hubs, closed after Christmas sales fell 50 percent, complicating store owner Doug Livingston’s efforts to find a buyer. For the past 12 years, the store had been a popular destination for shoppers buying microscopes, carnivorous plants, origami kits, and plastic skeletons.

Lost Confidence

“At the beginning of ‘08 we had some interest but then we hit September with the whole economic meltdown and the few people who seemed to be interested just evaporated,” Livingston said in an interview. “The biggest problem is confidence. We won’t see it turn up for at least six months.”

More than a dozen retailers, including Circuit City Stores Inc. and Linens ‘n Things Inc., filed for bankruptcy protection in 2008. Store closures have hit shopping center landlords including Developers Diversified Realty Corp., whose stock fell 95 percent during the past year to $1.85 today.

Consumers are cutting expenditures as incomes fall and homes and stock portfolios lose value. The U.S. unemployment rate jumped to 8.1 percent in February, the highest in more than a quarter century, the Labor Department said. U.S. household wealth fell by a record $5.1 trillion from October to December, according to Federal Reserve figures.

Normally, lower stock prices mean higher dividend yields, a prime reason why investors buy REIT stocks. The credit crisis has pushed such traditional measures to the margin as many REITs have cut dividends or paid part of them in stock along with cash.

Dividend Cuts

The dividend yield on the retail REIT index is 15.7 percent, more than five times the 2.95 percent yield of the 10-year Treasury note, a traditional benchmark of value. During the past decade, REIT yields averaged less than 2 percentage points above Treasury yields.

“That high dividend yield will shrink as the year progresses,” said Ben Yang, a retail REIT analyst at Green Street Advisors. “Dividend cuts are looming on the horizon.”

Another measure, price to net asset value, is difficult to establish because so few assets have traded recently.

There have been some signs of life in the retail industry that are starting to buoy investments. Investors got some good news on March 12. Sales at U.S. retailers in February fell less than forecast and a gain in January exceeded the previous estimate, the Commerce Department said, indicating the biggest part of the economy may be starting to stabilize.

‘Cheap’ Stocks

“People are going to start sniffing around because these stocks are a lot cheaper than they were a year ago,” said Yang.

Glimcher Realty Trust, which closed today at $1.28, and CBL & Associates Properties Inc., at $2.49, are two stocks that trade “like options,” said Yang.

Retail REITs are worse off because they borrowed more heavily than apartment and health care landlords, said Dean Frankel, a senior portfolio manager at Urdang Securities who helps manage about $1 billion of real estate securities.

Within retail, Frankel advises sticking to REITs that have stronger balance sheets and high-quality assets, citing Taubman and Federal Realty Investment Trust.

The real estate market has been in limbo while investors await government measures to deal with the collapse of the banking industry and boost an economy in its second year of recession.

Refinancing risk is driving REIT prices, said Prudential’s Halle.

“No one cares about value,” he said. “It’s about survival and making your balance sheet as strong as you can.”

To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net

Last Updated: March 16, 2009 16:49 EDT