25% Of U.S. Malls Are Expected To Shut Within 5 Years. Giving Them A New Life Won’t Be Easy

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What is going to happen to America’s dead malls? That’s a million-dollar question plaguing retailers and real estate developers.

With a report circulating earlier this month that the biggest U.S. mall owner Simon Property Group has been in talks with Amazon to convert some shuttered Sears and J.C. Penney department stores into fulfillment centers, many industry analysts have been pontificating on the future of malls as logistics hubs.

The consensus seems to be that turning old retail space into new warehouses might not be so easy, even though it might seem like a logical solution. Demand for logistics buildings is skyrocketing as e-commerce sales balloon. But the hurdles include the need to have properties rezoned, which could be met with pushback from local municipalities.

“Just because retail space has gone vacant or remained fallow does not mean that it is automatically a good candidate for repurposing into industrial space,” the head of Moody’s Analytics commercial real estate economics division, Victor Calanog, said in a report just released. “One cannot simply build industrial buildings in areas zoned for commercial use. Often, that requires rezoning areas — a long and tedious process with a low probability of success. State and local governments typically tax industrial properties at anywhere from half to two-thirds the rate of commercial properties, so municipalities have little incentive to rezone areas from commercial to industrial use, as they will collect less tax revenues.”

Demand for various commercial real estate asset types is expected to shift noticeably because of the coronavirus pandemic, with more people now working from home, flocking to the suburbs for space and buying online things they used to browse for in stores.

According to data pulled by Moody’s Analytics REIS, apartment development in the U.S. is expected to be down 15.6% in a post-Covid-19 world. Office development is set to drop 10%, it said, while retail falls 15.7%. Industrial development, meantime, is expected to pick up 3.6%.

The firm did find five markets where it said it would make the most sense to covert vacant retail space into warehouse space, based on where retail has been underperforming and where warehouse demand is hot. Those are: Central New Jersey, Northern New Jersey, Long Island, Memphis and Detroit.

But shopping malls are likely going to be shuttering in suburbs all across the country, as store closures grow in number and landlords capitulate. Another new report out this week from Coresight Research estimates 25% of America’s roughly 1,000 malls will close over the next three to five years, with the pandemic accelerating a demise that was already underway before the new virus emerged.

The malls most at risk of going dark are classified as so-called B-, C- and D-rated malls, meaning they bring in fewer sales per square foot than an A mall. An A++ mall could bring in as much as $1,000 in sales per square foot, for example, while a C+ mall does about $320. There are roughly 380 C- and D-rated malls in the U.S., according to an analysis by the commercial real estate firm Green Street Advisors. It has said malls rated C and below “are not viable retail centers long term.”

CBL & Associates, a Tennessee-based mall owner that has a number of B- and C-rated malls in its portfolio, has said it plans to file for bankruptcy by Oct. 1, highlighting just how much pressure these landlords are facing. Even high-end malls are under pressure, though. No one is really immune. An upscale mall owner in Miami, Bal Harbour Shops, is currently moving to evict the luxury department store chain Saks Fifth Avenue for not paying rent since mid-March. It owes Bal Harbour roughly $1.9 million, according to court documents.

“Despite being given months to honor its past due rental obligations and despite Saks’ impressive post-COVID sales at Bal Harbour Shops, Saks steadfastly refused to make any effort to pay any part of its rent,” Bal Harbour Shops President and Chief Executive Matthew Whitman Lazenby said in a statement. “Bal Harbour Shops has worked tirelessly to ensure our business and our tenants can survive and thrive in this environment. Regrettably, this injudicious behavior has left us with no other option than to terminate the Saks lease and sue to evict Saks from Bal Harbour Shops.”

A representative from Hudson’s Bay-owned Saks was not immediately available to comment.

About 90% of occupants in U.S. malls are either experiential tenants like movie theaters, or department store chains and apparel retailers, according to the Coresight analysis. This makes malls the most vulnerable type of shopping centers to the Covid-19 impact, it said, compared with other properties like strip centers that have grocery stores and outlet centers that offer consumers bargains.

During the pandemic, movie theaters and clothing shops have faced long windows of being closed, while consumers could still flock to strip centers for food, cleaning products and other essentials. In some states, such as New York and California, movie theaters remain closed to this day. And so with minimal revenue coming in, these are the businesses that are most likely requesting rent reductions, or not paying rent at all.

Mall developers had up until now been courting entertainment companies like Dave & Buster’s and iFly indoor skydiving, and restaurants like Cheesecake Factory, to lessen their dependence on shrinking retailers. But those businesses have also not fared well in an age of social distancing.

So, if not warehouses and entertainment complexes, analysts have pondered other potential use cases for so-called dead malls: Churches, medical facilities, office spaces and even apartment complexes.

But even office space is a risky bet now, as the working-from-home trend could become permanent for some. Workers in JPMorgan Chase’s corporate and investment bank, for example, will cycle between days spent at the office and at home, keeping the ability to work remotely on a part-time basis. The world’s biggest Wall Street bank by revenue has said it could shutter backup trading floors located outside New York and London as a result of the move.

The outdoor retailer REI is also looking to sell its recently completed corporate campus in suburban Seattle, shifting instead to more satellite offices, as a result of the pandemic.

“Unfortunately, this whole Covid thing has thrown the experiential pitch out the window,” Moody’s Calanog said in a phone interview. “Until we resolve this pandemic, I suspect we are going to be in a holding pattern with hollow retail space. Then we will see what the most viable format is.”

View the CNBC news video ‘How Shrinking the American Mall Will Impact Local Tax Revenue‘ below.

Source: CNBC

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Industrial Prices Expected To Increase Due To Pandemic

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Industrial prices could set to increase as a result of increased activity and rents during the pandemic.

According to a recent survey from RCM/LightBox, industrial players expect rents to increase from 4% to 7%. The asset class has already proven to be resilient during the worst months of the pandemic. As a result, many investors have flocked to the asset class.

“Experts in the industry—brokers, investors and developers—shared with us their expectations that by the end of the year we’d see pricing and rents increasing from 4-7 percent. Those expectations were expressed for many primary and a number of secondary markets, in key population areas, across the country,” Tina Lichens, SVP of broker operations at LightBox, tells GlobeSt.com.

Not all industrial assets are created equal. Manufacturing, for example, has not performed well during the pandemic. Investors as focused on ecommerce-related uses, pharmaceutical-related uses and any industrial supporting essential uses.

“Among the industrial properties to watch are those tied to consumer goods, pharmaceuticals, and other essential services, along with last mile facilities that support growing population bases with quick delivery options,” says Lichens. “Not to be overlooked are mission critical facilities, such as data centers and corporate food products facilities. Data centers, for example, have become increasingly important because so many people are working from home.”

Manufacturing and outdated industrial—which could pose a higher risk in a down market—are the least popular.

“Those subcategories that face the greatest exposure could be older, obsolete facilities along with smaller multi-tenant facilities, particularly those not in strong and established metro corridors,” says Lichens. “Given some of the uncertainties that exist in the overall economy, particularly for small businesses, it may be difficult to underwrite the acquisition of these facilities without predictable cash flow.”

The increased demand for ecommerce and the expectation of increased pricing has created enthusiasm for the asset class, but Lichens says that there is no reason to think that investors are being overly positive.

“Various reports point to growing consumer demand for online shopping and significant increases in store and online activity from Target, Walmart and others. Even before the pandemic, the experts pointed to the increase in ecommerce activity as reason to be bullish on the industrial market,” Lichens says. “The pandemic has truly emphasized our reliance on ecommerce and caused certain areas to experience tremendous growth. With more people in the U.S. accustom to and now embracing ecommerce, it has become a new way of life that has changed our entire consumer culture. It is difficult to envision a shift in the other direction.”

 

Source: GlobeSt.

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Investors ‘Back With A Vengeance’ As Warehouse Demand Surges

As shopping centre and high street landlords survey the wreckage left by coronavirus, warehouse owners are facing a different problem: how to deal with record demand.

The pandemic has pushed more consumers online, prompting a rush for warehouse space, from small “last-mile” delivery sites near city centres to cavernous “big-box” distribution centres

Amazon has led the charge. The company, which has added an eye-watering $600bn to its market capitalisation this year as sales have jumped, is inking lease agreements on mammoth warehouses around the world. It has committed to opening 33 “fulfilment centres” in the US this year, an additional 35m square feet spread from Atlanta to Arizona.

The US ecommerce giant is also the incoming tenant of a 2.3m square foot warehouse on London’s outskirts, according to people with knowledge of that deal. Amazon’s sprawling expansion is one reason why investors are sensing opportunity.

The take-up of UK logistics space hit record levels in the second quarter of the year, according to property group CBRE — despite the lockdown.

“Following a quiet few months after coronavirus hit, investors are back with a vengeance”, said David Sleath, chief executive of Segro, the dominant logistics company in the UK and a sizeable participant in Europe which last week said it had lifted first-half profit. “If you are a global institutional investor and you want exposure to commercial real estate, this is an attractive place to be.”

A decade ago, ecommerce accounted for 6.7 per cent of all retail sales in the UK, according to the Office for National Statistics. By February, the month before the outbreak, the figure was 19 per cent. By May it had hit 33 per cent. In April, 27 per cent of purchases were made online in the US, according to the commerce department and Bank of America.

Until recently, the most desirable property to own was a traditional mall. Malls had a natural moat, being difficult to develop and serving a catchment area

“That share was likely to diminish as stores reopened,” cautioned Mr Sleath, “but incoming tenants were looking to crystallise that temporary spike into increased capacity”.

“There’s a wall of cash coming into our sector,” said Marcus de Minckwitz, an investment adviser on European logistics at Savills property.

Every extra £1bn spent online means the addition of almost 900,000 square feet of logistics space, according to CBRE. New York-listed Prologis, the world’s largest warehouse company, estimates that 1.2m sq ft of space is needed for every $1bn in ecommerce sales in the US.

Gains from ecommerce tenants far outweigh the losses from bricks-and-mortar retailers, according to CBRE, one reason why Blackstone, the world’s largest private property owner, has described logistics as its “highest conviction” sector.

“Until recently, the most desirable property to own was a traditional mall. Malls had a natural moat, being difficult to develop and serving a catchment area . . . Logistics for a long time was viewed as the other end of the spectrum: not so exciting and more easily replicable,” said Ken Caplan, global co-head of Blackstone Real Estate. The rise of ecommerce had shifted that whole dynamic.”

In June 2010, Segro’s market capitalisation was less than £2bn, according to data from S&P Global. Now at £11.8bn, it is comfortably the UK’s largest listed property group; UK shopping centre owner Intu, meanwhile, has collapsed. The value of US peer Prologis has climbed a fifth this year to roughly $77.5bn.

Dozens of shopping centres in the US are being turned into industrial sites, according to CBRE, which says Covid-19 will accelerate the trend. This week, the Wall Street Journal reported that Amazon was in talks with mall owner Simon Property to repurpose department stores as distribution hubs.

Thanks to the ecommerce boom, CBRE predicts there will be demand for 333m sq ft of new space in the US by 2022 — treble its previous estimate — and expects rents to grow by about 6 per cent a year. Amazon is not the only eager tenant. Fashion retailers with a limited online presence have desperately sought space to park stock they could not shift in the pandemic.

“They already have warehouses full of clothes, then next season’s come in and they can’t stack it,” according to one UK property agent.

“But while some warehouse owners had suffered hits to rental income from retail tenants in particular, investors bidding for new sites were achieving few discounts,” said Mr de Minckwitz.

“Some indiscriminate investors were likely to get caught out, warned Mr Sleath. “There will be more retail fatalities, that will mean empty warehousing as well as shopping centres. It’s very important to think about where you place your money.”

Asset manager PGIM bought five German logistics sites last month and said it was optimistic that demand would only grow. Private equity firms are piling in too: as well as Blackstone, Meyer Bergman plans to raise €750m to invest in Europe.

“Investors needing long and strong sources of income, such as sovereign wealth funds and European pension funds, were also attracted by the sector,” said James Dunlop, a fund manager at Tritax Big Box.

“But some might come unstuck,” cautioned Adrian Benedict, head of real estate solutions at Fidelity. “There’s a flood of capital from retail to logistics. Inevitably, with every crisis, you see those poorly considered deals at the end of the cycle are the ones you really regret.”

 

 

Source: SFBJ