Posts Tagged ‘Shopping Malls’
The long lost shopping mall?
Common wisdom holds that the shopping mall is on life support. I venture into maybe one or two a year, and my most recent ventures weren’t very encouraging. Two recent Wall Street Journal articles illustrate the complexity of repurposing.
First, in a January 24th article by Ester Fung, “Mall Owners Rush to Get Out of the Mall Business”, the Journal notes that even the big-names in the biz are making use of strategic default to get rid of underwater properties. Citing data from Morningstar, the story detailed that from January to November 314 loans secured by retail property were liquidated, totaling about $3.5 billion. According to the story, these liquidations resulted in losses of $1.68 billion. Washington Prime, CBL and Simon have all sent properties back to lenders in recent months. Ironically, these big players have seen no dings to their credit ratings, and the equity market in fact views these put-backs as evidence of financial discipline. On the downside, surrounding properties, such as out-parcels and other nearby retailers, such as restaurants, that depend on spillover from the mall, are suffering from the loss of shopper attraction.
One alternative to strategic default is a revamping of the real estate itself. This often includes attracting a new or new type of anchor tenant or demolishing the mall entirely to make way for offices or apartments. Unfortunately, as detailed in a February 14 WSJ piece by Suzanne Kapner, existing tenants often have covenants or restrictions standing in the way of such revamping. In “Race to Revamp Shopping Malls Takes a Nasty Turn”, Ms. Kapner outlines how many department stores want to protect existing parking or existing exclusivity through “reciprocal easement agreements”. For example, large swaths of unused parking space have value for repositioning. However, as Gar Herring, chief executive of the MGHerring Group, a regional mall developer, put it, “But if you want to put a snow cone shack in a parking space furthest from the mall, you need the agreement of every department-store anchor.” Currently, for example, Sears is suing a mall developer in Florida to prevent it from adding a Dicks Sporting Goods as an anchor. Lord & Taylor filed suite in 2013 to stop a Maryland mall’s demolition to make way for offices, residential properties and a hotel. The retailer claimed violated an agreement signed in 1975 that prevents the landlord from making changes to the property without its consent.
The shopping mall is three different things. From a consumer perspective, it’s a place of gathering and consumption. Indeed, the loss of the shopping mall, which replaced Main Street, has sociological implications as well. Does Amazon.com now become a place of gathering as well as consumption? That’s an interesting subject for another day. Second, from a business perspective, the mall is a bundle of contracts, and sorting through those contracts will keep lawyers and real estate experts busy for some years to come. Finally, a shopping mall may be, in some circumstances, a valuable piece of real estate. Repositioning that real estate, either as retail with different tenants and focus, or as something other than retail, will be an interesting story in the coming years.
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October 10 — Update #2
Since my last post, I also had the privilege of attending (and speaking) at the semi-annual meeting of the Real Estate Counseling Group of America (RECGA). RECGA is a small but highly influential group, founded in the 1970’s by the great real estate valuation leader, Dr. Bill Kinnard, and over the years has counted in its membership many of the presidents of the Appraisal Institute and other leading groups, editors of several of the top real estate journals, noted professors and highly influential authors in the field.
The Fall meeting was held in Washington, DC, and the core of the meeting was Friday’s educational session. Max Ramsland opened up with a presentation demonstrating the impact of the number of anchor tenants on the appropriate cap rate of shopping centers. Carl Shultz, a member of the Appraisal Standards Board, followed with a discussion of impending changes to the Uniform Standards of Professional Appraisal Practice (USPAP). These changes are currently discussed in an Exposure Draft, which he invited RECGA members to revieww and submit comments about, and will be incorporated (with appropriate changes) in the 2012 edition of USPAP. Both Mr. Ramsland and Mr. Shultz are also RECGA members.
Two non-members followed with somewhat related presentations on eminent domain. Scott Bullock from the Institute for Justice was one of the attorneys who argued the famed Kelo case before the U.S. Supreme Court, and he discussed the status of eminent domain law since that landmark case. With a somewhat different perspective, we heard from Andrew Goldfrank, a U.S. Justice Department attorney who heads up all Federal takings litigation.
The afternoon session kicked off with David Lenhoff, a RECGA member and former editor of the Appraisal Journal, who discussed the complex issues surrounding hotel valuation. I followed with a brief synopsis on the Gulf Oil Spill, focusing on the current status of the claims and litigation processes. Reeves Lukens, a RECGA member, and his son, Tripp Lukens, discussed the state of pharmaceutical properties in the U.S. Joe Magdziarz, who is the incoming president of the Appraisal Institute (AI) discussed the current issues facing that organization, with a particularly emphasis on the recent controversies between AI and the Appraisal Foundation (AF). Notably, the founding Chair of AF, Jeff Fisher, is a RECGA member and was able to provide some historic commentary. RECGA members Jeff Fisher and Ron Donahue brought the day to a conclusions with discussions about the state of the securitized real estate market, including REITs.
For more information about RECGA, visit the web site, www.recga.com.
From a small northwestern observatory... 