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More mall trading due to depressed prices and heavy loans

Soon after the nation’s largest retail REIT, Simon Property Group, returned the Montgomery Mall in suburban Philadelphia to its creditors in late 2021, Cohn Retail Investment Group hit a 1.1-million-square-feet business. Net worth of $55 million.

Located on 105 acres in North Wales, Pa., Montgomery Mall is operated by Wegmans, Macy’s, JCPenney and Dix Sporting Goods. The regional mall, which originally opened in 1977 and was last renovated in 2014, at the time of sale to well-known retailers including H&M, Forever 21, American Eagle, Bath & Body Works and Outback Steakhouse 73 percent was leased. other.

According to JLL senior managing director David Monahan, Montgomery Mall generated interest from over 100 investors and received over 15 offers. He and his team (including Jim Galbali, Chris Munley, Cameron Pittman, Colin Behr and Akhil Patel) marketed the assets on behalf of CMBS Trust.

“There is a perception that there is no investor interest in the mall and no one has done business in the last five years, but that couldn’t be further from the truth,” says Monahan. “This has been a very active market for the regional mall space with 30 to 40 malls in business annually.”

creditors drive mall deals

In 2021, mall sales investment volume reached $7.42 billion, close to a six-year high of $7.48 billion in 2016, according to JLL’s analysis of data from New York City-based firm Real Capital Analytics (RCA). Unsurprisingly, the lowest mall investment volume was recorded in 2020 at over $4.5 billion.

Most regional malls that have been doing business over the years have been debt-laden Class-B and Class-C malls, carrying either mature loans that cannot be refinanced due to lender’s indifference or loan excess. property value.

“The lender universe has certainly become more conservative on the mall space in general,” notes Monahan.

The most recent peak for regional mall acquisitions by institutional investors occurred around 2010. At the time, several private equity firms, including Cyprus Equities, KKR and Starwood Capital Group, were scooping up regional malls to fund their opportunities and 10-year debt on properties.

Experts estimate anywhere from $30 billion to $40 billion in mall-related debt is coming in over the next five years. Also, there is a chasm between the current valuation in the market and the historical LTV.

According to Monahan, many regional mall loans that originated 10 years ago had LTVs of 70 percent to 75 percent. Now, LTVs are closer to 50 per cent. Further complicating the situation, mall prices have fallen significantly over the same period. While regional malls were trading at cap rates of 7.0 per cent a decade ago, they are now trading in the mid-double digits.

Many lenders prefer to extend the loan if the borrower wants to keep the mall, but if that borrower is not interested in continuing and operating the property, the lender is left with no option but to take the property to market. Is. According to Monahan, debt-driven trades, which include short sales and receivable sales, accounted for more than 70 percent of regional mall deal volume in 2019.

“Lenders don’t really want these assets back because they understand what happens and when they do,” Monahan says. “No one can operate a regional mall as well as a mall REIT, and it is very difficult for them to operate at that level.”

Monahan compares moles to “living and breathing” organisms that require constant re-investment to stay healthy. Many owners who end up selling don’t want to make that ongoing investment because they don’t see any future upside.

Mall REITs: Sellers, Not Buyers

Most of the regional mall properties that are going back to lenders were previously owned by publicly traded mall REITs or former mall REITs that were taken private. “Institutional owners are still committed to the space, but they are not committed to all of their properties on the same level,” notes Monahan. “Mall REITs are going to reinvest in properties they see as having better prospects for a better return on that reinvestment.”

For example, Washington Prime Group handed over Rushmore Mall in Rapid City, SD, to creditors in 2018. It operated in receivership until Rockstep Capital purchased the 823,816-sq-ft. Regional malls in late 2021. Run by J.C. Penney, At Home, Traders Market and Planet Fitness, the more than 100-acre property comes from a large four-state business area.

Houston-based Rockstep, whose strategy is to “fill real estate with high-quality, lucrative cash flow and future growth potential,” has rebranded the mall as Uptown Rapid. This acquisition is the firm’s second acquisition in South Dakota – it also owns Uptown Aberdeen in Aberdeen, SD.

Similarly, Brookfield Asset Management sold three regional malls in Michigan for a total of 1.3 million square feet. According to foot real estate data firm CoStar, in early 2021 to Cohan Retail Investment Group for $14 per sf. Over the past 12 months, the investment firm has negotiated “friendly foreclosures” for several additional malls.

Three Categories of Mall Buyers

With mall REITs and large institutional investors scouting for non-performing malls or those that no longer fit into their strategic plan, private investors are emerging as buyers of these assets.

These private investors can be divided into three main categories: opportunistic mall buyers, private value-added mall operators and local non-mall developers. Over the past two years, opportunistic mall buyers represented 70 percent of deal volume in the region, while developers made up 25 percent of the business, and operators made up the remainder.

“The hardest type of mall to do business with today is one that is very stable because there is no real upside,” Monahan says. “The capital looking to invest in this asset type today is not basic, it is opportunistic and value-added.”

Opportunistic mall buyers are looking for properties with steady cash flow. Using their own funds, this category of buyers has amassed individual portfolios of 120 or more properties over the years. The group is willing to acquire malls in smaller markets that other buyer groups avoid.

These opportunistic mall buyers aim to preserve the existing tenant base and cash flow for as long as they can without making any additional investments. Simply put, they’re going to squeeze every drop of juice out of the lemon, and once the juice runs out, they’ll toss the leftover pulp and bitter peel and move on to the next lemon and put the squeeze on it.

Private mall operators, meanwhile, are typically investing with equity partners, either individual or institutional. They plan to improve the mall through a variety of strategies, including redevelopment and redevelopment portions of the property to bring in new tenants or condensing the property by spinning off additional parking into pad sites. These buyers tend to be more selective with the markets and the property they pursue, which makes them less active than other buyers today.

Distressed malls – which are mostly empty and have no hope of saving – attract investment from local developers who have no interest or intention in the buildings themselves. These buyers are solely interested in the land on which these malls sit, and once they have control of the property, they demolish the mall and build something else, usually industrial or multi-functional projects. .

Lenders gradually warm up to malls

According to George Good, executive vice president of national retail group with real estate services firm CBRE, many mall buyers today are focusing on eliminating the fragmented ownership that exists for most malls. This fragmented ownership structure, where the department store owns its spaces and the other entity owns the remaining space, creates a very complex problem for buyers looking to redevelop or destroy mall properties.

“Fractured ownership means different entities and different motivations,” Good says. “That, and the lack of financing, have been the two biggest obstacles to the mall business.”

However, lenders are gradually becoming more willing to provide loans for regional malls in the quality spectrum, says Good. Although CMBS Bazaar is hesitant about funding Class-B malls, strong sponsors can still reach the drain market. Buyers acquiring Class-C malls can obtain bank loans, though with recourse, or pursue financing from debt funds that offer higher coupons.

Looking ahead, Good expects many Class-A malls to do business in 2022. “Pricing of mall properties is improving across the board, and there are talks about a mall,” he says. “We’re going to see some activity there, and I think everyone will be pleasantly surprised by the pricing. Even in the B mall space, those double-digit cap rates have come down, and better BS.” Coming back to single digit cap rates.”

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