Retailers are shelling out higher rents and renewing leases for 2003 despite dawdling sales, according to comments made by top mall REIT brass during the recent spate of third quarter 2002 conference calls.

Inventory and expense control initiatives are enabling retailers to keep up with rising rents, said Bob Michaels, COO of Chicago-based General Growth Properties. "The financial balance sheets of the major specialty retailers are generally in good shape, partly due to the fact that even though you have flat to slightly negative comp store sales you have also had 2-3% deflation in the price of goods purchased by apparel retailers over much of the last two years," he said. "So a 2% decline in sales matched by a 2% decline in cost of goods equals a wash. As we all know, all retailers worked very hard on the expense side of their operation. That is why you are seeing the margins hold up and be as strong as they are."

David Simon, CEO of Indianapolis-based Simon Property Group, agreed. "We believe the retailers have successfully adjusted their business model so as to operate profitably in a low sales growth, low inflation environment through better cost control and inventory management," he said.

But Tony Deering, CEO of Baltimore-based The Rouse Co., was unenthusiastic about the trend’s staying power. "Retailers have adapted well. But I think that’s a limited duration story in terms of our business. They’re not going to pay ever-increasing rents if they don’t start to see increasing sales."

The major mall REITs are also seeing strong leasing demand from retailers for 2003. Taubman Centers CEO Bob Taubman said more than 60% of his REIT’s 2003 leases are signed, with an additional 10% still out for signature. David Simon said 50% of his company’s 2003 lease expirations have already re-committed. "The major retailers like American Eagle and Abercrombie and The Limited are going to continue to (lease new space) even if they have a struggling Christmas, which I don’t anticipate," Simon said. "But some of the smaller guys might shave a little bit off. We’re not overly concerned about it."

General Growth’s Michaels said inline tenants are continuing to renew, and specialty tenant leases are filling the gaps left by traditional retailers that are cutting back in 2003. "Our temporary tenant leasing program and income continues to grow at double digit rates, and 2002 will certainly be our best year ever for this segment of our business."