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Commercial Property Sales | Commercial Property Values | CRE Finance | Retail Closures

What's In Store for Shopping Malls?

March 14th, 2017 | 3 min. read

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The shopping mall sector is taking a major hit with the extensive list of store closures and bankruptcies, which could ultimately lead to a decrease in the number of malls around the county. Sandeep Mathrani, chief executive of GGP Inc. (NYSE:GGP),estimates that the number of malls could eventually shrink from 1,100 to 800, which amounts to a quarter of all US malls.

According to Kroll Bond Rating Agency, Inc. (KBRA), the riskiest properties might be those that host the "triple threat" of tenants: Sears (NASDAQ:SHLD), Macy's (NYSE:M) and JCPenney (NYSE:JCP). Each of those firms have announced plans to close the doors on hundreds of locations in order to shore up their businesses. KBRA found that within the CMBS universe, 105 loans with a balance of $15.1 billion are backed by properties with the triple threat. Those are all at an elevated risk of default, particularly if their anchors close shop.

Typically, in-line stores (which pay the bulk of the rent at any mall) sign leases with co-tenancy clauses. If an anchor closes, those in-line stores can demand a reduction in rent, or they can vacate with little or no penalty. (Here comes the domino effect.) When an anchor vacates, a number of in-line stores can follow suit, which would result in a drop in foot traffic and then causes other anchors to leave, and so on. Soon, you could have a 1 million-square-foot echo chamber. But every property has its own story.

Examine the Foothills Mall in Tucson, Arizona. It was developed in 1983 by Bourn Companies and was positioned as a high-end mall, anchored by now-defunct department stores such as Levy's and Goldwaters. The property hit a rough patch in the early 1990s and was repositioned as an outlet mall. Business boomed and in 2006, the property was purchased for $104 million by a venture of Kimco Realty Corp. (NYSE:KIM) and Feldman Mall Properties Inc. The firms financed the transaction with $81 million of CMBS debt.

Then the real estate and capital markets collapsed. In 2010, it was sold to Schottenstein Property Group for $89.8 million. But its anchors included Linens 'n Things (which no longer exists), Saks Off 5th Ave. (NYSE:SKS), and Barnes & Noble (NYSE:BKS).

The mall was hit again when Simon Property Group (NYSE:SPG) opened the Tucson Premium Outlets, and syphoned some retailers including Old Navy (NYSE:GPS), Nike (NYSE:NKE) and Carter's (NYSE:CRI). Saks was said to be moving as well. Cash flow at the property collapsed and its CMBS loan went into default.

Earlier this year, the property was sold back to its developer for $19.8 million. The buzz is that the property will possibly be redeveloped into apartments (though retail and perhaps office space are not out of the question).

Might a similar strategy be the game plan for other ailing malls? That remains to be seen. But most malls are located in what had been and, in many cases, remain primary locations. Though they may no longer be viable as retail destinations, they might have a second life as something else.

Take the Hickory Hollow Mall in Antioch, Tennessee as an example. Hickory Hollow was a 1.1 million-square-foot enclosed mall that had been anchored by a JCPenney (NYSE:JCP), Dillard's (NYSE:DDS) and Sears (NASDAQ:SHLD). All of three of those retailers vacated, resulting in an exodus of the in-line tenants. It became a "dead mall" with only a dozen retail tenants.

Four years have passed, and the property has undergone a massive repositioning. Nashville State Community College took a slug of space previously occupied by Dillard's, converting it into a satellite campus. Another part of the property was converted into an ice hockey training facility, and a third into a public library. Yet another portion was converted into an international grocery store.

With retail caught in the crosshairs of changing consumer needs and preferences, prpoerty owners will certainly begin to weigh their options if the big-box firms are forced to contract.