For some time now the regional mall market has been dividing into two starkly different camps consisting of the “haves” and the “have nots.” Prime assets, such as the 324,000-square-foot Shops at Crystals on the Las Vegas strip, continue to command sale prices of more than $1 billion. However, investor interest in failed malls is meager at best by comparison.
Consider the following string of regional shopping malls that sold in the past few weeks. The three properties – all located in outlying, sparsely populated areas and all hit with major store closures — join the list of 76 other malls of 100,000 square feet or larger that have sold for less than $10/square foot in the last two years:
- The 503,626-square-foot Gadsden Mall in Gadsden, AL sold for $9.85/square foot ($4.96 million) after trading for $58.8 million in 2005.
- The 358,057-square-foot Aiken Mall in Aiken, SC sold for $8.45/square foot ($3.03 million). In 2007, the same mall carried an appraised value of $26.3 million.
- The 746,410-square-foot Fairgrounds Square Mall in Reading, PA sold for a ridiculously low $1.54/square foot ($1.17 million). In 2007, the mall carried an appraised value of $50.7 million.The buyers of these properties all employ strategies aimed at turning dust into diamonds. Hedge fund investor Farallon Capital Management, which acquired the Gadsden Mall, has acquired a number of failed or under-performing malls after raising $375 million in a real estate investment fund in 2014.
Southeastern Development Associates, which does business as Ramp G Partners LLC, bought the Aiken Mall. The Augusta, GA, developer plans to revamp the indoor mall into an outdoor, mixed-use shopping and dining hub.
Hull Property Group acquired the Fairgrounds Square Mall. Hull Property Group has 40 years of experience specializing in re-positioning under-performing enclosed malls.
“The mall has some strong anchor tenants and is positioned in a prominent and important high-traffic location but it is not succeeding as an enclosed mall. A path forward toward success must be determined in order to revitalize this property,” said Jim Hull, managing principal of Hull Property Group.
It goes without saying that such sales represent an extreme example of the disparity evident in the two types of malls and make up just a tiny portion of overall mall sales. An almost equal number of malls have sold for more than $1,000/square foot.
Since 2014, there has been about 1,125 malls that have sold for a combined $34.15 billion at an average price of about $153/square foot, according to CoStar information.
“As the disparity in mall performance increases, a market of “haves” and “have nots” is emerging. Properties that generate higher sales per square foot, and the REITs that own them, will widen the gap with weaker malls more exposed to E-commerce erosion,” Morgan Stanley Research noted in report this week entitled Malls Aren’t Dying (Just Some of Them).
“The mall industry isn’t dying, but it may shrink significantly as differences in quality drive a bifurcation in performance,” the Morgan Stanley analysts noted. “Properties that can maximize and grow sales per square foot – the primary measure of productivity and a key driver of rents – will succeed.”
While many analysts, including Morgan Stanley, lay the blame for lower retail sales at the foot of e-commerce, numbers released by the US Census Bureau this week show that isn’t necessarily the case. As expected, e-commerce sales generated a higher growth rate than overal retail sales. The first quarter 2016 e-commerce estimate increased 15.2% from the first quarter of 2015, while total retail sales increased 2.2% in the same period.
However, e-commerce sales accounted for just 7.7% of total retail sales in the first quarter according to the Census Bureau. The vast majority of retail sales — 92.3%, are not online.
The bigger concern, at least for regional malls, appears to be the sales trends seen in department stores. The bad news was that department sales were down 3% compared to the first quarter of last year, even though total retail sales were up. And that continues a long line of declining sales, as annual department store retail sales peaked in 1999 and have declined every year but one since then.
Retail layoffs in 2016 are already at their highest since 2010. There has been about 37,000 layoffs in the retail sector through April, primarily from store closures and retailer bankruptcies. That compares to 26,100 for the same period last year, according to outplacement firm Challenger, Gray & Christmas. That firm tallied only 9,200 jobs announced in retail hiring plans this year.
Last week, Macy’s, Kohl’s, Nordstrom, and JCPenney all reported first quarter declines in same-store sales. Macy’s significantly reduced its annual earnings outlook, which included expectations of a 3%-4% decline in same-store sales.
Based on comments from first quarter retailer earnings reports thus far, retailers said they will continue to try to right-size their space needs.
Some analysts still point to e-commerce as a prime factor behind the decline in department store sales. Moody’s Investor Services in a research note today sees the sector’s current cyclical downturn as different from previous ones, saying online sales are pushing distribution costs higher and prompting greater price transparency, which is reducing prices and margins and prompting retailers to sharpen cost cutting. Moody’s expects more department stores to close more stores, build smaller boxes and sublease space.
Others aren’t so sure, but there is nearly universal agreement that shopper traffic is down at many malls.
“I think it’s been pretty well documented out there that mall traffic overall has been soft over the last probably couple quarters,” said James F. Nordstrom, president of Nordstrom Stores. “We’ve seen some data recently over the last month or two that it was down, approaching double-digits. And we notice that. We are primarily in malls. And when we see mall traffic go down, it hurts us.”
Michael Glimcher, CEO of WP Glimcher Inc., said, “Retail store closures are simply a part of the business. I personally have been doing this for over 25 years and I know with certainty that they will continue and we will also continue to replace them.”
“While department store anchors are still an important component of mall health, their role as anchors has diminished as other traffic drivers have emerged and so the impact of more closures on Class A malls (which they refer to as “the survivors”) would actually be a long-term positive,” said Garrick-Brown serves as vice president of retail research for Cushman & Wakefield.
“The reality is that nearly every major department store chain out there was already working on plans for right-sizing their footprints,” Brown added. “The challenge is one of timing. Most retailers have been proceeding with strategies that have tried to focus on closing underperformers as leases expire so as to minimize costs.”
Heading into this year, Brown cautioned that retail closures would be at their highest levels since 2010, but would impact the under-performers and help strengthen the survivors.
“There won’t be many closures hitting the trophy properties,” Brown said. “The few that happen will still be backfilled. But there will be a strong indirect impact in terms of weakening the tenant pool. But the picture is only going to get worse for Class B and C malls and lifestyle centers.”
