Redeveloping Old Malls Into Value Add Real Estate Investments

This recent article, How Dead Malls Are Resurrecting As Something Else, has a look at how malls are quintessential to American Culture but how many are facing a very tough path forward. Though for the savvy real estate investor this change could make old malls a great investing opportunity.

“The shopping mall is the quintessential American contribution to the world’s consumer culture, but the conditions that led to the creation of shopping malls and sustained them for decades are changing rapidly,” noted the Urban Land Institute — back in 2006.

The article then went on to highlight a number of mall redevelopment projects both successes and failures. Another important highlight from the article was what Simon Property Group (The largest mall owner in the US) is now looking at for its redevelopments.

Simon Property, which owns malls across the country, reported occupancy of 94.7% for all of its U.S. mall properties as of June 30.

Rent spreads were up as were funds from operations for the second quarter. “We see a bright future for our portfolio but it’s not without challenges,” Vlahos said.

Simon is working to reinvent its mall properties using trade area demographics to determine the best future fits for particular properties. “Maybe it’s entertainment; maybe it’s food; maybe it’s experiential retail,” Vlahos said. “All of us are trying to get a handle on that.”

This article from AllianceBernstein, Not Dead Yet: What Many Investors Get Wrong About The American Mall, has some very interesting thoughts on the future of malls as their potential for real estate investment.

Headlines about the death of the American shopping mall have become so common that the phrase “retail apocalypse” has its own Wikipedia page. But this is a death wrongly foretold – and that creates investment opportunities.

It’s true that some malls are dying. Foot traffic is down as more Americans shop online, while shifting demographics have made malls in some parts of the country obsolete.
We estimate that a third of the 1,200 malls that were operating at the start of 2017 will close their doors, with most of the casualties in less affluent areas where population growth isn’t keeping up with other parts of the country.

Many investors have tried to profit from the shopping mall’s expected demise…Here’s the problem as we see it: not every mall is destined to close. We think plenty are likely to adapt and survive. And those that do fail won’t all do so at once.

Investors Business Daily has a great look at 1 investor who sees great promise with old malls especially those that might be the most overlooked like those in rural areas, The Investors Who See Plenty Of Life In Dying Malls.

Buying malls on the cheap leaves Hull with plenty of money for aesthetic improvements, such as raising the ceilings and removing kiosks in a bid to create long sight lines and a sense of open space.

Hull is one of a small crowd of operators bucking the conventional wisdom that there are simply too many malls and that only those catering to wealthy shoppers will survive the death of legacy retailers.

While operating strategies vary, most are shopping for older malls in places with no other enclosed shopping center within 50 to 100 miles.

Such older properties have some inherent advantages. Many were built as the surrounding community was sprouting, so the original developers had their pick of the best locations.

Despite the rise of e-commerce, people still come to malls to participate in the social aspect of shopping — especially in suburban or exurban places with few large gathering places.

Investors outside Philadelphia could likely begin to find those type of more rural properties moving towards Reading and the Lehigh Valley or even heading west towards Lancaster.

Value-Add Strategies For Redeveloping An Old Mall

For those looking to invest in old malls the Urban Land Institute asked a panel some thoughts on how to succeed going forward, Industry Outlook for Shopping Centers, (Below are some excerpts from their answers.)

  • Retail and entertainment-related uses in close proximity to where they live. Health and wellness uses are also important.
  • When we look at reshaping a shopping center, changing the mix of uses from 20 percent restaurants to 40 percent restaurants represents a huge shift.
  • Offering an authentic experience is a way to make your shopping center not necessarily internet-proof but at least internet resistant, or perhaps “internet complementary” is a better phrase.
  • It’s important to do whatever you can do to draw foot traffic while not forgetting fundamentals, such as parking, visibility, and access.
  • More and more entertainment uses are replacing department stores, whether that means live entertainment, sports bars, users like Dave and Buster’s, movie theaters, or restaurant concepts.
  • Tearing down the department store and replacing it with a residential component. Residences, in particular, add value to the center, not only making it relevant to the market, but also helping to boost the shopping center’s sales by putting more people on the site.
  • Shopping malls have not traditionally been town centers with offices and apartments, but these are highly viable uses for these properties, especially if you can get enough density to support expanded hours for the retail portion. The office workers will use the mall in the daytime, and the residents will use it in the evenings.