Shopping Mall Solvency Back In Focus

When news emerged last week that mall operator Washington Prime Group was considering bankruptcy, few — if any — retail or commercial real estate industry watchers were surprised. After all, WPG had been trending lower since 2014 and had been downgraded deeper into junk status after missing a bond payment in early February. Add in the fact that two other mall operators — CBL Group and PREIT — had taken a similar path of protection from creditors just three months before, and WPG’s plight not only makes more sense, but also suggests that a post-COVID shift toward shopping mall solvency may be in the works.

With the worst of pandemic-related retail stress presumably now behind us, and the herd of brick-and-mortar chain stores substantially culled over the past year, there is finally enough breathing room to refocus on a problem that has plagued the retail industry long before the advent of COVID.

Too Much Space

Certainly, the pace of rising eCommerce and declining department store sales accelerated during the pandemic, and the additional retail bankruptcies, anchor-tenant closures and location reductions seen over the past 12 months have only exacerbated the problem for retail landlords.

Commercial real estate advisory Green Street Advisors has long held that the U.S. is “over-retailed,” with substantially more retail square footage per capita than any other country, and is among firms expecting that 30 to 35 percent of existing malls will ultimately have to close.

“Green Street believes mall asset values have fallen approximately 45 percent from the 2016 peak, while mall appraisal values have dropped just 15 percent, likely because of a scarcity of transactions,” the company said in its 2021 U.S. Mall Outlook. That’s a complex way of saying that it’s not a seller’s market right now, and that any forced liquidations would produce questionable returns.

“Real estate funds would likely suffer a large impairment/write-down charge associated with selling a mall at current clearing prices,” said Green Street Senior Retail Analyst Vince Tibone. “A more palatable decision seems to be holding onto the asset and hoping the outlook for malls improves.”

Reimagining Malls and Repurposing Space

In the words of Washington Prime CEO Lou Conforti in his company’s third-quarter letter to investors, “it’s certainly not an easy task, [but] WPG believes our reimagined assets are an integral part of this proposition.”

The problem is that while reimagining, or repurposing, empty or under-performing retail space is a widely held aspiration, the actual cost of redeveloping a property, the time involved in doing the work and finding new tenants, and then implementing the plan is substantially more difficult.

That said, there are occasional retail transformation stories — such as Discover Financial last week agreeing to turn an empty Target store on Chicago’s South Side into a giant call center — but they are the exception rather than the norm. From a purely retail standpoint, such repurposings do little to enhance the overall appeal of a shopping complex — and, in fact, could actually hurt it. “Turning a shuttered mall into an eCommerce warehouse or a residential complex could reduce the value of the property anywhere from 60 percent to 90 percent,” noted a recent report from Barclays.

Two Sides of the Retail-to-Industrial/Warehouse Trend

In July, global real estate management firm CBRE published a report that flagged the acceleration of a property conversion trend, while The Wall Street Journal reported in August that Amazon and mall owner Simon Property Group were in talks about converting Sears and JCPenney into fulfillment centers.

“Retail-to-industrial property conversions are accelerating across the U.S., driven by the growth of eCommerce. There are now 59 such projects that have either been completed, proposed or are underway since 2017 — up from 24 in January 2019,” the CBRE report said. “These projects total approximately 13.8 million sq. ft. of retail space converted to 15.5 million sq. ft. of industrial space.”

While that is certainly a significant increase and a lot of space, rival real estate firm Cushman & Wakefield said in December that the “trend” was actually a “mere sliver” in the grand scheme of things. “The general public seems to think this is a sure thing, with many people assuming much of the vacant retail space will eventually be warehouse or industrial space,” the report said, while highlighting a pandemic-driven surge in speculation concerning the conversion of vacant retail space into distribution centers or last-mile facilities.

“The instances of retail-to-warehouse conversions are a mere sliver in the overall amount of new industrial deliveries,” the Cushman report said, noting that of 1.4 billion square feet of new industrial supply that became available since 2016 — 80 percent of which was logistical properties — “retail-to-warehouse conversions [made up] less than one-tenth of one percent (0.073 percent) of the total industrial inventory.”

So What Is Working?

A February panel discussion called “Exploring the Mall of the Future” took a fresh look at an old problem, which included the benefit of knowing about recent vaccine news and solid retail sales data. According to panelist Steve Plenge, the managing principal at Pacific Retail Capital Partners, when it comes to “chopping up” old box stores, there are often significant municipal hurdles, as well as the rights of existing tenants and shared owners who have a say in any changes via reciprocal easement agreements (REAs).

“Most often, when you look at repurposing these [properties] from the standpoint of tearing them down and looking at bringing in mixed-use, or multifamily or office, or one day bringing back hotels, these are all things that we’re studying,” Plenge said. But when it comes to creating a vibrant destination where people want to visit, Plenge said that “open space, parks, gathering spots — these are draws, these are a new reason to come to these sites, to have a place to hang out, to have a place to develop restaurants around these green spaces.”

“Farmer’s markets are off the charts,” noted panelist Lee Peterson, EVP of thought leadership at retail design firm WD Partners — as is consumer demand for grocery stores, open space or green space, food halls and smartly configured traffic and parking — to facilitate increased BOPIS/BORIS (buy online pick up/return in-store) opportunities. “There’s a lot of different things consumers like,” Lee said, “and I think we’re going to have to do that going forward to increase visitation at shopping centers.”