Consumer trends and unwieldly buildings drag down price of mall properties | Business Observer

Table of Contents The storyEconomic reality Word came May 23. The Crossings at Siesta Key

Table of Contents

Word came May 23. The Crossings at Siesta Key mall had sold for $25.1 million. That followed October’s news that DeSoto Square in Bradenton had sold for $20 million. In 2019, Edison Mall in Fort Myers sold for $33 million.

That three older malls, malls long past their glory days and part of a retail sector a chunk of consumers no longer seem to want, sold was not a surprise. What did surprise some is the price they went for.

It shouldn’t have.

At a time when multifamily and industrial properties are regularly setting pricing records, and when home prices show little sign of slowing down, the price for traditional malls are in steep decline. These properties, large swaths of land off of major highways and roads, with buildings hundreds of thousands of square feet in size, would presumably be worth so much more. But driving down the cost of the mall properties is a complicated mix of economic factors and plain reality.

We’ve all read the stories about malls, what they used to be back when it was where everyone gathered. It was the town square long after the town square faded. Main Street before they killed Main Street.

Today’s mall owners have to compete against e-commerce and other retail plazas, sometimes called lifestyle centers, that offer something that give shoppers a reason to visit — all while dealing with tenants that face similar headwinds.

What happens then is the big-piece property becomes a burden rather than a benefit, forcing owners to unload mall properties at what would seem like bottom of the barrel pricing.

Data backs this up. According to Green Street, a commercial real estate analytics firm, mall values spiked after the financial crisis following 2008, peeking in late 2016. Since then, Green Street estimates the value of A graded malls has fallen 35%.

“I can kind of give you a little bit of the backstory in terms of why it seems like these properties went from, at one point in time, being the pot of gold at the end of the rainbow, to pieces of property where, now, it seems like they’re being transacted at, I don’t want to say salvage value, but something a little north of salvage value,” says R. Christopher Jones, a professor of economics at the University of South Florida and president and chief economist of Florida Economic Advisors.

 

The story

The tale Jones tells is eerily similar to the one told by many analysts over the past 20 years. 

With the rise of e-commerce, there has been a decline in brick-and-mortar retail. And, as the king of retail for the better part of the second half of the 20th century, no entity was poised to take as big a hit as the local, neighborhood mall.

But how does that reconcile with the figures, and the anecdotal evidence, that consumers are back shopping in stores after COVID-19 and as some retailers have adjusted how they do business to attract modern consumers?

According to Placer.ai, which tracks foot traffic at retail locations, visits to indoor malls in April grew 14.8% over March, making it the best month of 2022. When compared with 2019, before COVID sent everyone home and supposedly changed shopping habits forever, foot traffic in April 2022 was down just 0.3%.

That’s where it gets tricky. The problem malls have, which does have its root in consumers’ changing habits, has mostly to do with the business model. An inability to fix the model is what’s driving prices down, analysts say.

The biggest issue traditional malls are dealing with is that the format — three or four anchors and tons of inline stores — makes them rectangular dinosaurs in the modern world. What happens is, the space is a liability because of the high cost to maintain it and turn a profit.

And as more and more department store chains close locations, more and more space goes vacant. That can be seen at malls across the Gulf Coast — and the country — where huge spaces that once held bustling Sears or JCPenney, or even Dillard’s and Macy’s, stores now sit vacant, sometimes for years.

For a time, one of the solutions was to find an alternative type of tenant when anchors left, but that’s not always worked experts say. It’s expensive to retrofit a large box space and even harder to find tenants who can fill a space that size and be profitable. And too often the tenants that do fill it, can’t generate the kind of revenue mall owners need to stay profitable.

This, of course, is coupled with tenant turnover inside.

The property becomes a financial burden and its value plummets.

What happens then, Jones says, is the properties get sold at a deep discount because the buyer is not likely interested in maintaining it as a traditional mall or when, operating it, keeping the status quo.

“They’re not necessarily looking for those boxes,” he says. “In fact, those boxes are a liability to them. They want the land, and the land use entitlements that came with that land.”

Case in point? The Crossings at Siesta Key, which sold in May.

In 2003, Westfield, then a mall powerhouse, bought the property for $62 million.

Within a decade though, Saks Fifth Avenue left and several inline tenants, including Pottery Barn and Williams-Sonoma, followed. In 2016, Westfield spent $8 million to renovate the property, bringing CineBistro to Saks’ former space. A year later the company announced plans to turn the mall into a lifestyle center, with the introduction of a Lucky’s Market and four restaurants.

Every one of those moves is a textbook example of what experts say traditional malls must do in order to stay relevant to modern shoppers. Those moves have worked, too, in many cases. But not for Westfield’s Siesta Key property, which is actually not on Siesta Key but at the intersection of Bee Ridge Road and U.S. 41 in Sarasota, five miles south of downtown. 

In December 2020, Westfield, now Unibail-Rodamco-Westfield, announced O’Connor Capital Partners, a New York-based private equity firm, had taken over the Westfield Siesta Key mall, calling the property a “non-core” asset.

And in May, Manatee County-based Benderson Development bought the property for $25.1 million — 59.5% less than what Westfield paid 19 years earlier.

Benderson has not said what it will do with the property. A company spokeswoman, who says she could not make an official available for an interview, did not respond to an emailed set of questions about the purchase or plans for the mall.

 

Economic reality

When all is said and done, the reason the value of malls is dropping comes down to basic economics and business.

Nelson Taylor, vice president of market research for commercial real estate firm LSI Cos. in Fort Myers, says a purchase price is still based on a return and possible rent growth over the projected holding period. Demand is strong in the multifamily sector because the potential for rent appreciation increases the yield on the investment. Because of that, money pours in and investors are paying high prices.

But, because the outlook for malls is dim, investors are not willing to “pay as much for a mall’s income stream due to the inability to forecast future occupancy and rent growth,” he says.

“Figuring out how to utilize large footprint buildings is an extreme challenge and will continue to persist and place downward pressure on pricing of this asset class.”

That doesn’t mean it can’t be done.

One example of a mall property undergoing a massive reinvention is in Tampa.

RD Management LLC bought University Mall, which opened in 1974, in 2014 for $29.5 million. The mall, less than two miles from USF, had once been a top shopping destination in the area. When New York-based RD stepped in, it made a conscious decision to move the property in an entirely new direction, transforming it from a traditional mall to one with innovation-focused tenants, mostly in research, technology and medicine, along with a retail component.

When complete, Rithm At Uptown, as it’s now known, will be one of the largest, mixed-use innovation communities statewide, with capacity for more than seven million square feet of development, including several thousand residential units, RD officials say.

Including the acquisition, rezoning, master planning and demolition, RD has invested about $50 million into the property. An additional $65 million is going toward a student housing complex on the site currently under construction.

All new mall owners may not follow this path. New owners who’ve invested relatively little for big properties may raze existing malls to make way for new developments or maybe redevelop them as lifestyle centers. One thing is clear though, even at the new price points, most real estate and retail experts agree that the status quo is no longer enough.  

Green Street, in its annual report, says the better malls, like International Plaza in Tampa and The Mall at University Town Center in Sarasota, have adapted and that the country’s top 250 malls, based on quality, should be fine.

“But it is reasonable to assume that several hundred lower quality malls will either close or become irrelevant retail destinations over the next 10 years.”


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