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It’s Sink or Swim as Malls Battle Back

As we hit the halfway point of 2018, things are looking pretty good for retail. The positive momentum that began during the holidays has carried the sector in the right direction and away from much of the doom and gloom that had firmly set in by this time last year.

Thanks to a stronger economy, stores have been afforded some breathing room, allowing the best to improve and the weakest to hang on, according to Garrick Brown, vice president of retail intelligence at Cushman & Wakefield.

In the mall sector, that’s sometimes translated into improved metrics in foot traffic, sales or leasing.

In the company’s Q1 earnings call, Simon Property Group said demand is “picking up.” President and COO Rick Sokolov said potential tenants have “capital to spend and they are more focused on new opportunities than they were last year and that’s because of our optimism.”

Robert Taubman, chairman, president and CEO of Taubman Centers, has characterized the turnaround as a “retail revamp,” while Stephen Lebovitz, president and CEO of CBL Properties called it a “broad-based recovery in retail.”

Though things are better, mall owners are still cautious and working hard to ensure the good times last.

Mergers & acquisitions

At the start of the year, Cushman & Wakefield declared that 2018 would be marked by rampant merger and acquisition activity—and they weren’t alone. Thus far though, it looks like those predictions were overblown.

Retail, in particular, has been fairly quiet in terms of those type of deals. Commercial real estate, on the other hand, has been subject to a bit more churn.

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Even before the calendar rolled over, the changes began with the $15.8 billion sum Unibail-Rodamco spent for Westfield Corp., the 12th largest retail property owner in the U.S. That was followed by the Brookfield’s acquisition of OliverMcMillan in February, just one month before it was swallowed up by GGP for $15 billion one month later.

And that’s likely to be just the beginning, according to George Papageorge, global head of business development at Streetsense, a company that focuses on creating experiences in the retail space.

“I think you can read the tea leaves. At the very top levels at the five biggest developers in the country, a majority of them are in some type of change or shake up,” he said. “You’ll see more cross mergers where maybe a larger hotel developer may buy an experience consultancy to help them monetize pieces of their portfolio that they don’t have the expertise in.”

Mark Hunter, managing director of CBRE Retail Asset Services in the Americas, agrees, saying the move to mixed-use redevelopment has property owners looking to bolster their core competencies either through acquisitions or strategic affiliations.

“The trend toward redevelopment has just started as department stores close their locations,” he said. Sometimes that’s meant bringing in entertainment ventures like theaters, while others have opted for simpler overhauls that involve subdividing boxes for a variety of uses. “Lately what you’re seeing is department stores being demolished with new uses like office, residential, universities and medical that are growing.”

The Brookfield/GGP deal exemplifies how companies can quickly onboard the tools they need to evolve, according to Brown.

“Brookfield, in particular, makes an awful lot of sense,” Hunter said. “Brookfield is a great mixed use developer especially in urban settings and GGP has a strong urban retail portfolio. There are all sorts of synergies they can use to strengthen properties. I wouldn’t be surprised to see other deals happening.”

With Brookfield, GGP is now in a position to redevelop its centers with living and office elements, he added.


Creating live/work/play environments continues to be top of mind as property owners look to create built-in foot traffic. And while the constant drumbeat of store closures sounded like a death knell to many, it’s been music to some mall owners’ ears.

For instance, Simon Property Group has been actively reclaiming Sears locations as the beleaguered retailer continues to shed dead weight. Calling it a “terrific opportunity,” COO Michael E. McCarty, said in a press release that the group is planning “a combination of innovative retail, restaurant, and entertainment concepts are in play for each center.”

Both Simon and GGP have planned to spend $1 billion a year on redevelopments over the next two to three years. While the pair are among the biggest spenders, Macerich has said it expects to invest up to $300 million a year and Kimco is on pace to spend $250 million.

While it sounds like there are a lot of properties at play, the building frenzy fizzles quickly once you get too far past the A malls.

“B malls are on a tightrope,” Papageorge said. “They have to be more shrewd and bold and think more outside the traditional mall space for solutions because they’ll rarely overtake the A mall.”

Brown, agrees. While offering “sweetheart deals” is one way to go, he’s seeing B properties making bigger moves. Some are reaching out to off-price chains, which are typically partial to off-mall locations—though they are in a growth mode. Another non-traditional option is grocery stores. While supermarkets haven’t been a mall fixture in the U.S., Brown said it’s quite common in Europe, and now the concept is starting here.

And while some trends are emerging like gyms or food halls, Papageorge warns against me too-ism. He said his company is constantly fighting the battle against developers that want a cookie cutter solution for their properties. But, he said, it won’t work.

“Too many people think a mall is a mall,” he said. “This is where developers struggle because they’ve looked at things in one way for a long time. The best developers will need to be nimble and put the resources and thinking around them to understand what space means to that consumer in that market to create that particular experience.”

He advises clients to step back and observe the environments around them, taking note of “how people move through hotel lobbies, how they move through restaurant queues and how they determine how they’re going to use their apps to direct them.” Armed with this knowledge, they can then begin to plan their own spaces.


While getting the mix right is a challenging job, it’s a privilege that too many property owners just don’t have. Short on capital, and often long on debt, the shopping centers in the worst shape can only dream of starting over. And for many, it’s more like the beginning of the end.

“By the time you get to a class C mall, there aren’t a lot of options. What’s going to happen is you’ll see the death spirals of the weakest malls accelerating,” Brown said. “You’re not going to see those get redeveloped until they go back to lenders until new parties can buy them for pennies on the dollar. It’s a story that’s barely begun but it will be picking up as we go forward.”

C malls aren’t alone in this plight though.

Fitch Ratings has been keeping a watchful, dubious eye on B malls since 2013.

The June edition of the company’s special report on commercial mortgage-backed securities, revealed that retail accounts for 75 percent of its negative ratings outlooks. The financial institution identified 55 loans backed by regional mall and outlet properties representing $3.7 billion as Fitch Loans of Concern. The worst of this bad bunch are 30 so-called category 1 FLOCs in which the properties have in-line sales that top out at $300 per square foot at best, weak anchors or empty anchor boxes and poor occupancy. While categories 2 and 3 are less dire, in some cases the average loan sizes are bigger.

Compounding the problems, eight of the 55 flagged loans have maturities in 2020 totaling $433 million.

“A lot of the regional malls we’re seeing are in earlier vintage deals and they’re 10-year loans so if they were issued in 2011 or 2010 then they only have a couple years left before they need to refinance,” Mary MacNeill, the head U.S. CMBS surveillance for Fitch, said, adding the outlook for some of these is very poor. “In some cases it’s a refinance story and then the ones where they’re losing anchors, we’re seeing more loans we’re expecting to default this year.”