The prime malls values ​​are down 45% in comparison with 2016: Inexperienced Avenue

A visitor looks down an empty hallway at the Fashion Mall in Keystone in Indianapolis on Wednesday, March 18, 2020. Simon Property Group, the largest shopping mall owner in the nation, is closing all of its malls and retail properties because of the coronavirus outbreak.

Darron Cummings | AP

When Macy’s Chief Executive Jeff Gennette stated at an investor meeting in early 2020 that a “division of malls” was emerging and that the state of the subordinate malls was continuing to “rapidly decline”, he had nothing bad to do with, say, A-rated malls.

Instead, Gennette said the department store retailer will continue to invest in its A-rated malls locations as it has closed other underperforming properties.

According to a report by commercial real estate services company Green Street released this week, the values ​​of even some of the best malls in the US have plummeted astonishingly in recent years. Green Street now estimates that the scores for A-rated shopping centers have fallen by around 45% compared to 2016, which peaked after a run-up after the Great Recession.

A-rated shopping malls are an important part of surveillance in the retail real estate industry as they make up most of the value of malls in the United States. According to Green Street, there are around 250 of them, which is a quarter of the roughly 1,000 malls in America. They average $ 750 in sales per square foot compared to an A ++ mall at $ 1,100 or a B mall at $ 425 and a C mall at $ 250.

“Mall values ​​have made a very strong recovery from the global financial crisis,” said Vince Tibone, senior retail analyst at Green Street, in an interview.

“The general retail environment was much healthier,” he said. “At the time, the feeling was that e-commerce was a big deal, but malls were more immune. And the feeling in ‘A’ malls was completely different. We had a lot of transactional evidence that strongly suggested it – to the best malls in the country – Net operating income grew at a healthy pace, cap rates were low and funds were available. “

But that story has changed over time. Even on A-rated malls, fundamentals have gradually weakened, in large part due to the weaknesses of department store chains, who historically have been the anchor tenants, attracting shoppers and encouraging other retailers and restaurants to move in, Tibone said he did exerted even more pressure in the past 12 months as the Covid pandemic brought new challenges.

The largest US shopping mall owner, Simon Property Group, owns a significant portion of the US A-rated malls and outlet centers. Its shares have fallen more than 32% in the past 12 months. Investors have pulled back on Simon, even if many analysts say it’s the strongest player in the mall. Simon has a market cap of more than $ 32 billion.

A representative for Simon declined to comment on the Green Street report.

However, the biggest risk in the years to come isn’t for A-rated malls, but B- and C-rated malls, Green Street said. The latter two groups will have to find entirely new uses in the years to come, while A-rated malls have a much better chance of remaining viable by adding non-retail space to the mix.

For example, Simon traded two department stores in Broadway Square Mall in Tyler, Texas and Cape Cod Mall in Barnstable, Massachusetts for a Dick’s Sporting Goods and a Target, respectively. The Real Estate Investment Trust expects to spend around $ 140 million on ongoing refurbishment and redevelopment projects by the end of this year.

“Death spiral”

Obsolete anchors are the number one risk factor for mall values, according to Green Street. The real estate company estimates that around 360 department stores in shopping centers have closed since 2016. Around half of the remaining department stores in shopping centers are expected to be closed by the end of 2025.

“Department stores pay minimal rents, but their impact on the center can be far greater when co-ownership clauses are triggered,” said Green Street. These clauses allow tenants to lower their rents, usually when there are at least two free anchorages on a property.

Macy’s is about to close dozens more department stores this year, while JC Penney is considering another 15 closings through March, after more than 150 stores closed since filing for bankruptcy last spring. (The company emerged from bankruptcy after being bought by Simon and Brookfield Asset Management.)

Green Street estimates that Macy’s currently accounts for 18% of US malls’ anchorage. Penney accounts for another 18%; Sears 2%; while other department store operators like Nordstrom and Neiman Marcus account for 27%; Anchors from non-department stores make up the remaining anchorage in shopping centers.

North Carolina department store chain Belk filed for bankruptcy protection on Tuesday as private equity firm Sycamore Partners will take majority control. It’s unclear whether the deal will include additional store closures.

“A mall is a fragile ecosystem,” said Green Street. “When conditions deteriorate noticeably, a mall can enter a ‘death spiral’ – in which lower sales productivity leads to falling occupancy, resulting in fewer visitors being attracted to a declining group of retailers, which is the cycle of declining sales and utilization continues. “

“This vicious cycle can continue until the mall becomes obsolete,” it said.

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