For owners of regional malls, Sept. 11, the notion of security has taken on a whole new meaning.

The goal is to make shoppers safe and secure without scaring them away, according to Dougal Casey of Clarion Partners of New York.

Casey was part of a panel discussing the consequences of Sept. 11 for landlords of high-traffic buildings during a recent meeting of the Counselors of Real Estate in Washington, D.C.

Sales per square foot at regional malls declined significantly in 2001 compared with 2000 even as retail sales generally rebounded from late September and October, when the severest impact of Sept. 11 was felt, he said.

As consumers backed away from regional malls, they took their business to “open-air retail settings” that feature home-improvement centers and drugstore chains. And those are the kinds of places where sales increased.

“Malls need a first-rate security plan,” Casey said. Additional measures that raise the rents by $1 square foot a year are not likely to send tenants looking for alternative space, most experts believe.

However, the rising cost of insurance is not being included in this equation. The number of carriers of terrorism insurance have dropped to 15 from 40 in the last six months. Some landlords are self-insuring equity against terrorism losses, and some lenders also are self-insuring their portfolios.

But insurance availability and higher costs are leading some lenders balk at loans, and some institutional lenders also may stop lending, Casey said. Many of the existing terrorism insurance policies expire June 30, and what will likely replace them are policies with high deductibles and premiums. If those costs are passed on to tenants, even if there is no immediate impact on net operating income, “tenants may not want to renew leases when they come due,” Casey said.

For the moment, values are holding, as are cap rates, and FFO rates have improved of late.

The lodging industry, too, continues to suffer from the economic downturn and the effects of Sept. 11, especially with the decline in air travel, said Bjorn Hanson of the PriceWaterhouseCooper. The drop in the occupancy rate immediately after Sept. 11 was 26 percent, but is now only 5.5 percent lower, he said. The average daily rate had been down 15 percent on Sept. 16 but is now only 4 percent lower.

“In major cities such as New York, occupancy is close to where it was before Sept. 11, but rate discounting is the reason,” Hanson said.

Hanson predicts that occupancy rates will be 59.9 percent lower in 2002 compared with 2001. The primary cause is a reduction in corporate travel imposed on employees in the face of the recession.

“The economy alone explains 83 percent of what has happened to demand,” Hanson said. “You can induce leisure travel by dropping rates but not business travel.” Still, lodging remains a profitable industry, with $17 billion expected in 2002 compared with $23 billion in 2000. Such profits have been assured because it has become less expensive to operate hotels, interest rates are low and there has been decline in the number of new hotel rooms coming on the market.

Office markets, too, have been impacted by the lower GDP growth, said Antonio Bismonte, of TriZecHahn Office Properties of Chicago, which owns the Sears Tower.

He believes that central business districts will see a 14 percent vacancy rate by year’s end, with non-CBDs at 20 percent.

Sept. 11 has indeed changed life at high-rises such as Sears Tower, aside from the emotional impact of what happened at the World Trade Center, Bismonte said.

“Communication is critical,” he said. “We really focus on getting the tenants to participate. Evacuation drills even involve the executives.” At the end of the day, it is still all about running a business, Bismonte said. Notions of life, safety and security went out the window on Sept. 11. Now, there is systematic analysis of security situations, “to make tenants and customers comfortable with coming to work.” The Sears Tower has doubled security staff, introduced metal detectors, bomb sniffing dogs, X-ray machines, car searches and vehicle barriers, Bismonte said.

Still, as you head west from New York, tenants don’t seem to be as concerned about security issues, he said.

“The real issue is accessing terrorism insurance,” Bismonte said. An increase of 50 to 100 percent in insurance costs will have a real impact, and a lot of lenders are sending notices to landlords making sure that terrorism insurance exists.”

Published: March 7, 2002

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Al Heavens writes about real estate and home repair and improvement. He is the author of What No One Ever Tells You About Renovating Your Home: Real-Life Advice For Hassle-free, Cost-Effective Remodeling.