Few investors are queuing up to buy America’s unloved regional shopping malls. Landlords like Westfield’s owner need creative ways to unload them if they are to patch up their stock prices.
US malls have lost a third of their value since their 2017 peak as the pandemic has accelerated the shift to e-commerce, according to real estate analytics firm Green Street. The best malls, especially those with luxury brands as tenants, are doing fine. Sales have recovered and they have been able to renew debts: The International Plaza in Florida, which is part-owned by Simon Property Group, refinanced a $477 million loan in October at a low 2% floating rate, based on data from Trepp. But poorer-quality malls are struggling to attract the tenants and capital they need.
Some owners are looking for the exit. Europe-based Unibail Rodamco Westfield in particular wants to get rid of certain U.S. assets to pay down debt it shouldered in 2018 to buy Westfield’s portfolio, including the namesake malls in New York and San Francisco. Its borrowings are now equivalent to 16.6 times projected earnings before interest, taxes, depreciation and amortization. Reducing that to its target of nine times would allow the company to concentrate on its more attractive European business and might revive interest in its stock, which is down almost 60% since the start of 2020.
Major landlords have already started to cut losses on the weakest locations by handing them back to lenders, usually malls where the debt is worth more than the property itself. The Westfield Palm Desert mall, for example, was recently valued at $85 million and had $125 million of debt outstanding. Simon and Brookfield Property have also put what they consider no-hope malls into voluntary foreclosure.
In total, owners have handed over the keys to more than 20 U.S. malls since Covid-19 first spread, according to Green Street. But this is still only a fraction of America’s so-called Grade B and C malls.
Some struggling properties could be converted to other uses. In April, landlord Macerich sold a stake in the Paradise Valley Mall in Phoenix for $100 million to a developer who plans to convert it into new homes and offices. Malls are usually built on large sites with decent access to infrastructure, so can be candidates for redevelopment. Westfield has approval to convert space in its New Jersey and Maryland malls into mixed-use properties, including homes. Another option is to turn them into e-commerce warehouses or distribution centres. Amazon has opened a new fulfillment facility in Ohio on an old mall site.
While these ideas look good on paper, only a trickle of sales and revamps have actually happened. Around 50 enclosed regional U.S. malls have been sold during the pandemic, according to a professional handling the auctions, most of them by lenders. The limited number of “healthy” malls sold may reflect unrealistic asking prices, the difficulty of getting finance for retail deals and the fact that converting them is capital intensive. Developers often prefer to buy land and avoid the expense and complexity of tearing down an old mall.
Landlords may be biding their time until footfall and occupancy rates recover from the pandemic in the hope of getting a better price. This makes sense considering Unibail said third-quarter sales in its U.S. malls were above 2019 levels. Shares in Simon Property, which mostly owns high-quality malls, are back above precrisis levels.
Some investors are making contrarian bets on the most tired malls. Real estate specialists Namdar Realty Group and Kohan Retail Investment Group have been buying assets cheaply and continuing to run them as retail locations. Turnbridge Equities made a killing earlier this year when it sold a North Carolina mall for $95 million to Fortnite’s owner Epic Games for the company’s new headquarters. It paid just $31.5 million for the property in 2019.
But landlords can’t see such buyers as white knights. The opportunists prefer to snap up assets in distressed sales, paying a fraction of malls’ old valuations. Until more buyers think there is money to be made in mall makeovers, the likes of Westfield have a tough sell on their hands.
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