A shopping mall with fast fashion stores | Source: Shutterstock
Only about $3 billion of retail real estate changed hands in April, a 27 percent drop from a year earlier and the lowest monthly tally since February 2013.
NEW YORK, United States — Landlords have malls they’d like to unload. But who’d want to buy them?
As they battle the rise of e-commerce, US mall owners are trying to clear their books of fading centres so they can focus on the most-profitable ones. That’s proving difficult, with just a shallow pool of investors who are willing to take on a declining mall and even fewer who would pay what the landlords want. Only about $3 billion of retail real estate changed hands in April, a 27 percent drop from a year earlier and the lowest monthly tally since February 2013, according to the latest data from Real Capital Analytics.
Mall giants such as Simon Property Group and GGP are spending billions to update their centres, adding experiences that can’t be found online and reinventing the cavernous spaces left behind by failing department stores. But there’s a growing set of lower-tier malls that have slid too far toward irrelevance to be worth a costly overhaul.
“It’s a tough environment. I don’t think anybody really anticipated the decline of the department store to happen as quickly as it did,” said Joe Coradino, chief executive officer of Pennsylvania Real Estate Investment Trust, which owns 21 malls in the Mid-Atlantic region. “The sellers are clearly on their knees.”
The Philadelphia-based REIT has sold 17 bottom-tier malls since 2013. The last deal, completed in September, was a $33.2 million transaction for the Logan Valley Mall in Altoona, Pennsylvania, anchored by Macy’s, JCPenney and Sears stores. If those same properties were on the market today, prices would be substantially lower, Coradino said.
“I’m very, very happy I sold those malls,” he said.
For all but the best centres, the number of buyers — and the group of lenders willing to fund such acquisitions — has dwindled to a trickle. The handful of investors that are active in the space are demanding steep discounts to take on the risks of shaky tenant rosters, falling foot traffic and an antiquated business model.
Not long ago, some of the biggest names in private equity, such as KKR & Co. and Barry Sternlicht’s Starwood Capital Group, were laying out substantial sums to snap up retail properties. In 2012 and 2013, Starwood purchased a combined $2.6 billion of malls from Westfield, followed less than a year later by a $1.4 billion deal to buy seven malls from Taubman Centers. From 2012 to 2014, KKR bought four regional malls for about $502 million, Real Capital data show. That demand has all but evaporated as timing a wager on American malls becomes increasingly treacherous.
KKR still has three of the malls it purchased, according to Real Capital. After pouring millions into the Broadway Mall in Hicksville, New York — for a face-lift and an update of the interior — the firm started marketing the property last year, according to people with knowledge of the talks, who asked not to be identified because the negotiations were private.
The 1 million-square-foot property in suburban Long Island, acquired in 2014 for $94 million, houses an Ikea as well as mall staples including Claire’s, Express, Aeropostale and Macy’s, according to its website. That lineup points to the fragile ecosystem of many malls. Claire’s filed for bankruptcy in March, while Aeropostale went bankrupt in 2016 before being bailed out by a consortium that included Simon and GGP.
A representative for KKR declined to comment.
Starwood, which two years ago made an unsuccessful attempt to sell some of the malls it acquired from Westfield, recently tapped the Israeli bond market to refinance debt on the properties. A Starwood representative declined to comment.
It’s hard to pin a number on how many retail properties are potentially on the market. Publicly traded mall landlords prefer to keep details to themselves rather than field questions on quarterly earnings calls about their progress on selling specific assets, according to Haendel St. Juste, an analyst at Mizuho Securities USA.
“There’s definitely a pent-up backlog of malls the REITs want to sell,” said Thomas Dobrowski, an executive managing director at brokerage Newmark Grubb Knight Frank. “It’s just a matter of them getting over the hurdle of deciding to sell and having some catalyst that will give them a reason to sell into this market.”
It’s easy to understand their reluctance to sell now. Prices for malls fell 14 percent in the past 12 months, even as values for other types of commercial properties, such as warehouses and office buildings, rose or held steady, according to Green Street Advisors. At least four properties have been pulled from the market in recent months because the bids were too low, Dobrowski said.
Landlords sitting on mediocre malls in hopes of getting a higher price at a later date may be missing their window, according to St. Juste. All indicators point to lower values in the future, he said.
“If you’re thinking about selling an asset down the road,” he said, “it would be wise to think about pulling it forward and selling now.
By Sarah Mulholland; editor: Daniel Taub and Christine Maurus.
BY BLOOMBERG
