Mall giants Westfield Group, Simon Property Group and General Growth Properties are marketing 40 malls across the country, an unusually large number for any one time. The sellers are hoping to take advantage of the slowly improving economy and commercial-real-estate market
But the deals also might pose challenges. Most of the properties on the block are among the lower quality properties owned by the sellers and companies are hoping to sell them at a time that the retail sector is facing changes due to an oversupply of product and competition from Internet shopping.
Malls were among the most battered sectors during the commercial-real-estate crisis. Vacancy rates for malls in the top 80 U.S. markets rose to 9.1% in the first quarter, the highest rate that research company Reis Inc. has tallied since it began tracking mall figures in 2000.
What is more, mall executives and analysts alike anticipate a prince-and-pauper recovery for the industry, with high quality malls that generate lofty sales bouncing back more rapidly than their trailing peers. Struggling malls in deteriorating markets are expected to sustain the brunt of store closures, lingering vacancies and changing consumer demand.
The mall companies that are selling clearly recognize this. Westfield, based in Sydney, is marketing 17 malls in seven states and plans to use the sale proceeds to finance $2 billion of redevelopment and renovation of its stronger U.S. properties, people familiar with the matter say. They note that their better malls generate an average sales per square foot of $400 or more.
Most of the Westfield malls for sale are considered to be of average or slightly above-average quality, known in industry terms as B-grade properties. They generally generate annual sales per square foot between $300 to $380. The industry average is $352, according to Green Street Advisors, a real-estate-investment-trust research firm in Newport Beach, Calif.
Similarly, General Growth, which owns 169 U.S. malls, intends to jettison many of its laggard malls. The REIT emerged from a 19-month bankruptcy stint in November with new management, new investors and a new balance sheet. Chief Executive Sandeep Mathrani wants GGP to focus on its top 150 malls by selling 19 less lucrative malls. He would then use the proceeds, estimated at more than $2 billion, to pay debts.
“We actually believe the winds are behind our back” in selling malls, Mr. Mathrani said during GGP’s fourth-quarter earnings call on March 1. “If the market stays with us, we would like to execute that this year.”
Sales of malls have been picking up. According to Real Capital Analytics, 57 mall deals totaling $2.6 billion closed nationwide in 2010 compared with 20 deals valued at $710 million in 2009.
Activity is picking up partly because real-estate financing is becoming more available, thanks to the slow resurgence of the commercial-mortgage-backed securities market.
“CMBS lenders have been more … comfortable going lower on the quality spectrum of retail properties,” says Cedrik Lachance, an analyst at Green Street. “That’s creating financing for B-quality malls and an emerging pool of financing for even lower quality assets.”
But prices for malls haven’t been robust lately. During the boom years, demand was so high for malls properties that buyers were accepting initial yields of a low 6.4%, according to Real Capital. That yield in 2010 was 8.8%, just slightly improved from 9.0% in 2009.
Also, most often, big REITs sell such declining malls to local investors who redevelop them into different uses such as big-box, discount centers. Finding even that type of buyer might require a steep discount, given that the outlook for mediocre malls isn’t great.
Consider the four malls being put up for sale by Simon Property, the largest U.S. mall owner with 363 properties. Their average age is 27 years and it has been an average of 13 years since the last major renovation, according to a report by Benjamin Yang of Keefe Bruyette & Woods. The decision to sell “could suggest reinvestment in these properties may not be justified, given their dimmer futures,” the report states.
But that raises the question of how much an investor would be willing to pay for them. A discount might be necessary partly because the properties “may need reimagining in some fashion,” the report states.
Simon has hired brokerage firm Holliday Fenoglio Fowler LP to market the properties, people familiar with the matter say. The four–Boynton Beach Mall and Gulf View Square in Florida, and Knoxville Center and Oak Court Mall in Tennessee–average annual sales of $285 to $330 a square foot, according to Green Street. Their occupancies range from 80% at Knoxville Center to 95% at Oak Court Mall.
Evercore Partners is handling the sales for Westfield, which owns 55 malls in the U.S, 56 in Australia and New Zealand and eight in the U.K. Among the malls that Westfield has put on the block are Downtown Plaza in Sacramento, Calif.; Solano mall in Fairfield, Calif.; Belden Village in Canton, Ohio; Connecticut Post mall in Milford, Conn., and Westland mall in Hialeah, Fla. Those slated for upgrades include Century City in Los Angeles, Valley Fair mall in San Jose, Calif., and Garden State Plaza in Paramus, N.J.
“The problem is that all of these are hitting at once, so you have a lot of product out there and not a lot of buyers,” says Steve Sakwa, an analyst with International Strategy & Investment in New York.