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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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How hot is the residential real estate market in parts of western Palm Beach County?

Hot enough that builders are seeking zoning changes to permit them to abandon already approved commercial projects and convert them into high-density residential developments with limited commercial parts.

 “The shift shows that builders can get a greater return on their investment by going residential,” said Jesse Saginor, a Florida Atlantic University professor who monitors real estate trends in South Florida. “There is not much of a wait to find buyers, regardless of the price point, for new homes in Palm Beach County.”

The latest example involves the vacant northwest corner of Hypoluxo and Lyons roads in suburban Lake Worth. It may soon be the site of Windsor Place, a 393-unit development that calls for 157 townhomes, 236 rental units and 30,192 square feet of commercial space, including a grocery store and a drive-through restaurant.

In 2005, previous owners obtained approval for 115,078 square feet of commercial space that included a 41,000-square-foot anchor store along with 184 townhouses. The new proposal seeks to more than double the number of residential units and represents a significant decrease in the amount of commercial space. The parcel is one of the last remaining, sizeable, undeveloped tracts west of Lake Worth Beach.

The development company behind the project is Hatzlacha WP Holdings, founded by Charles M. Scardina, once a senior vice president of Ansca Homes. Scardina was involved in a lengthy legal battle with his former partners, which settled in late 2017. Shortly after that, he bought the 40-acre parcel for $15.2 million.

But Scardina now says in a report filed with the county that the initial plan will result in “an improper use of the site” as there is too much other commercial development in the area. The report noted the changes were necessary because the original project “too closely mirrored” the adjacent Town Commons shopping center on the east side of Lyons Road.

Earlier this year, another company owned by Scardina made similar arguments for his Terra Nova project at Hagen Ranch Road and Atlantic Avenue west of Delray Beach.

Scardina’s Principal Development Group proposed a change from a mostly commercial project to one with 275 rental units and a drive-through restaurant. A group of area homeowner associations banded together to create the Common Sense Development Coalition to fight the plan on the grounds that the residential density is too intense. Scardina is working with coalition members to see if he can address their concerns.

And recently, another commercially approved project at Jog Road and Boynton Beach Boulevard is undergoing a change as the new owners seek permission to build an assisted living facility, which will reduce land devoted to commercial uses by 4 acres.

 “There is little land left in Palm Beach County to build homes,” said residential builder Alex Akel. “It is possible that residential builders may even buy up existing shopping centers and convert them into project that would include housing.”

Much has been written about how the tax law changes have fueled a luxury-home boom in South Florida but Saginor said the impact has been felt across all price points. Saginor of FAU said there is just as much a demand for homes between $300,000 and $800,000 as there are for luxury homes.

Additionally, with the rise of online shopping, brick and mortar stores are in decline. Strip center stalwarts Toys R Us and Sports Authority are gone. Booksellers, video stores and record shops are nearly extinct. Macy’s, Sears, JCPenney and Office Depot are shrinking.

Meanwhile, it is not clear whether Scardina will face the kind of fierce opposition for Windsor Place that he faces at Terra Nova west of Delray Beach. Plans call for Windsor Place to abut the 1,100-plus unit development at Bellagaio, which is northwest of the proposed development. The project calls for apartments in seven three-story buildings with each building containing 32 or 34 units.

A 4-acre lake separates the two developments. Access will be from both Lyons and Hypoluxo roads. The grocery store will be at the intersection. According to the builder’s traffic study, the development will generate an additional 3,738 trips a day on the already heavily congested Hypoluxo-Lyons road intersection.

 “Bellagio and other area HOAs are in active discussions with the developer,” said Pam Rothman, president of the Bellagio Homeowners Association. She declined further comment.

Repeated efforts to obtain comment from Scardina and his consultants were unsuccessful. Scardina asked the county Planning Division on June 18 for more time to submit detailed plans as he seeks the support of Bellagio and other nearby developments — Valencia Shores, Savannah Estates and Villagio.

The zoning changes would result in:

  • A significant increase in housing density.
  • New zoning classifications for both residential and commercial parts of the development.
  • Elimination of 59 guest parking spaces for the rental units.

If approved, the builder expects Windsor Place to be completed in 2023.

 

Source: Palm Beach Post