Regional malls continue to be challenged. Eighty-five percent or so of distressed mall loans that have gone back to lenders have been sold and cycled back out to the private sector during the past 10 years, and many of these malls will need to be redeveloped. Active buyers of distressed regional malls have now become sellers themselves as they look to raise capital to acquire the next distressed real estate product type-CBD office buildings.
Which malls stay and which go often is dependent upon the property’s debt structure and the ability for that debt to be restructured or re-financed in an environment of declining mall valuations. Whether you’re a mall REIT or a private investor, you may have a property with a loan maturing in a year and you may be underwater on that loan. The mall owners/borrowers then have to make a choice: Do they consider that mall to be a viable core property worth ongoing capital investment? If not, the likelihood of the property going back to the lender is far greater, especially if the loan is non-recourse. Tenants have become sensitive to committing long-term to properties in distress.
For malls to survive, landlords need to be committed to a level of capital spending that maintains the integrity of the property’s physical plant, attracts synergistic tenants, creates and maintains an inviting shopping environment, and is advertised and promoted to best compete with other shopping venues. Unfortunately, over the past 10 years many buyers of distressed regional malls have been taking the exact opposite operating approach by bleeding the property’s cash flow and not re-investing in the asset. We are now starting to see anchor tenants that own their own parcel within a distressed regional mall looking to protect their brand image and their investment by considering an acquisition of the mall itself to avoid being held hostage by a buyer that lacks the ability and the intention of improving the property’s operating performance.
The retail industry today is truly a “Tale of Two Cities,” full of haves and have-nots. To paraphrase Dickens, “It is the best of times, it is the worst of times.” There are great challenges, but also great opportunities. The operators that emerge successfully will be the visionaries who are best at planning for the unknown.
Frederick J. Meno is president & CEO of Asset Management and Asset Services at the Fort Worth-based Woodmont Company.