Small Is New Order For Struggling Malls
September 24, 2012
MACON, Ga.—Many
struggling shopping malls are trying to find salvation by going small—in their
purchasers, sales prices and, in some cases, size of commercial real estate in San Diego.
As the nation’s largest
mall owners sell off or give up their most-troubled properties—dogged by
deteriorating neighborhoods, newer rivals and online sales—smaller real-estate
companies are snapping them up at discount prices and trying to find ways to
pull them out their death spirals. Sometimes, that involves demolition.
It is a high-risk
turnaround game that is gaining favor among local companies and small
specialists that are gambling they know local markets well enough to succeed
where the big guns failed.
Consider this city’s
sprawling Macon Mall, which Hull Storey Gibson Cos. acquired in 2010 for just
$6 million. The deal came after the property’s $111.4 million mortgage was
forgiven by the lender, which had put the mall into receivership for more than
two years after a previous owner, Lightstone Group, went delinquent on the
debt.
Macon Mall, built in
1975 and expanded in 1997, was once the region’s dominant shopping center. But
competition from the nearby Shoppes at River Crossing shopping center, opened
in 2008 and about 12 miles from Macon Mall, siphoned its sales—and its tenants.
The mall suffered from neglect before and during its receivership, eventually
losing four of six anchor stores. Slightly more than half its small shops were
vacant. Lights were burned out in the parking lot and trees and shrubs were
overgrown.
The new owner’s
solution: Demolish roughly a third of the moribund mall’s 1.5 million square
feet to get it to a more appropriate size for its market. Hull Storey also
dismissed laggard shops and cleared its halls of clutter-creating kiosks,
overhauled the mall’s interior and slowly brought in better stores. The costly
turnaround is in its infancy, but signs of progress are emerging: Macon Mall’s
sales on a per-square-foot basis last year rose 14.3% to $270, reversing a
multiyear decline. A few new retailers have signed on.
“It’s not going to be
dominant like it once was,” said James Hull, a managing principal of Hull
Storey. “But it is going to be a successful mall.”
Nationwide, the number
of subpar shopping malls—generally defined as malls generating less than $300
in sales per square foot—is growing at a rapid rate, as the sluggish economy,
shifts in consumer habits and chain-store closings reduce the number of tenants
and the profits for retail landlords and companies in commercial real estate in San Diego.
Of the more than 1,000
enclosed malls in the U.S., roughly 300 generate less than the
$300-per-square-foot ratio, according to Green Street Advisors Inc., which
tracks real-estate investment trusts. The industry average is roughly $370.
The dismal economics
have led large developers like Simon Property Group Inc. SPG -0.50%to dump the
properties, either handing them over to lenders or selling them to local
investors.
That is when buyers such
as Hull Storey, Alberta Development Partners in Denver and Whichard Real Estate
in Raleigh, N.C., step in. Most of these buyers are local operators with only
one or two malls. Hull Storey, based in Augusta, Ga., is among the largest,
with 20 malls across the Southeast.
To be sure, rescuing
troubled retail properties such as commercial real estate in San Diego isn’t for the faint of heart.
“Buying challenged malls
is pretty far up the risk spectrum,” said Don Provost, founding principal of
Alberta Development, which converted the dying Southglenn Mall near Denver to
an open-air shopping center with apartments in 2009. This year it bought the
Foothills Mall in Fort Collins, Colo., for $39.6 million to do a similar
overhaul. “In buying these assets, we believe we are going to get returns that
equal that risk. It’s not easy, or everyone would be doing it,” Mr. Provost
said.
According to Real
Capital Analytics, 48 of the 201 U.S. malls that traded hands since early 2010
were sold out of “troubled” situations, most often involving delinquent mortgages.
In most cases, the value of those properties fell so sharply that they were
sold for much less than was owed on them. In the past year, malls with
defaulted mortgages were sold at prices amounting to an average of 63% of their
mortgage balances, according to Real Capital.
“These mall transactions
show that investors now are interested in higher risk but potentially higher
yielding retail investments in the U.S.,” said Ben Carlos Thypin, Real
Capital’s director of market analysis.
An uptick of sales of
such moribund malls has ramifications for the retail-property market, namely in
the acknowledgment by lenders and other sellers that, including commercial real estate in San Diego, the properties aren’t worth what they once
were. That will result in a decline in property values for struggling malls,
though such declines were unavoidable and overdue. For municipalities, it
likely will mean that work to rehabilitate and reposition the malls, many of
which languished for years, finally will begin under new owners.
Hull Storey executives
say that they can take drastic measures such as demolishing an entire wing of a
mall because the company pays paltry prices and assumes none of the malls’ previous
debt.
Hull Storey has followed
this strategy repeatedly this year, buying three malls from lenders: Piedmont
Mall in Danville, Va., for $11 million; Village Mall in Auburn, Ala., for $13
million; and Liberty Fair Mall in Martinsville, Va., for $6 million. Each
amount was a fraction of the debt owed on the property. “It is a rare day when
we pay more for a property than the value of the dirt” that it stands on, said
John Gibson, a Hull Storey managing principal.
The Macon Mall’s
troubles led to its annual sales per square foot declining to $237 in 2010 from
$318 in 2007. Stores closed, and a 2007 brawl in the mall’s food court, caught
on a mobile-phone camera and posted online, scared away shoppers.
Now, after 18 months of
demolition and remodeling work by Hull Storey, new retailers are trickling in.
The mall recently added a Subway sandwich shop and a Smok’n Pig BBQ restaurant.
Its Shoe Dept. store soon will more than double its space. And two new stores
will open in October, enticed partly with lease rates slightly below market
levels: a B. Turner’s midprice apparel store and a Dry Falls Outfitters
outdoor-wear store. Hull Storey executives declined to divulge the cost of the
overhaul beyond saying that it is multiple times the $6 million purchase price
of the mall.
Macon shoppers have seen
the changes. Kenyana Carswell, a 27-year-old Macon resident shopping at the
mall in early August, said she had taken notice of the mall’s new décor,
lighting and uncluttered appearance. But, “they need more stores, to bring ones
like Old Navy back,” she said. “People like variety.”
Hull Storey predicts
that a full turnaround and revamping of Macon Mall’s tenant roster will take
another 18 to 24 months. “It is a two- or three-year commitment, and you won’t
see any immediate results,” Mr. Gibson said. “You have to have faith.”
This is true for commercial real estate in San Diego and all people in real estate.
Source: The Wall Street
Journal
DISCLAIMER: This blog has
been curated from an alternate source and is designed for informational
purposes to highlight the commercial real estate market. It solely represents
the opinion of the specific blogger and does not necessarily represent the
opinion of Pacific Coast Commercial.
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