Keeping Ahead of the Curve

The Future of the Enclosed Shopping Mall in Secondary and Tertiary U.S.
Locations

I was just reading an article about the future of the Mall of America in this
Sunday’s New York Times (2.1.09) and the impact of potentially changing shopping
patterns of American consumers given the deep recession we are currently in.

For secondary and tertiary locations, changing demographics mandate a change of

orientation for many enclosed shopping malls. Environmental factors are as
important as tenancy problems and community livability issues. This dynamic
creates a complex yet potentially rewarding situation for municipalities, tenants,
shoppers and mall owners/lenders alike.

It is fair to say that being a creation of the 1950’s, the enclosed shopping mall is not
the most environmentally friendly commercial real estate that has ever been built.
Expansive parking lots, large flat roofs with monolithic windowless department
stores and products that are often treated with less than healthy chemicals are just
some of the environmental problems confronting mall owners and retailers of the
21st century.

So, how do we effectively re-develop these behemoths into real estate that is
commercially viable and user friendly for the 21st century?

Here are some ideas and theories to float around:

1) The size of parking lots required in many enclosed shopping malls will
decrease substantially as malls are re-developed into urban villages with
more user friendly and pedestrian space.
2) Many department store anchors will go “dark” in the next few years which
will require owners to think of creative ways to make the mall not look as
“dead” as it really might be.
3) Many municipalities will be faced with mounting unemployment, decreased
sales tax, property tax and income tax revenues.
4) Consumers will potentially spend at least 30% less on discretionary shopping
than they have in the past. Coupled with the increase of on-line shopping
and the greater focus on consumer essentials, the tenant mix of most
enclosed malls will become obsolete.
5) Many municipalities will experience an aging of their populations.
6) The price of fuel and other utilities is expected to increase in the long run,
even if the discretionary income of the consumer decreases.
7) The potential for price deflation of somewhat non-essential items, like
automobiles, clothing, and real estate may have already commenced.
Some possible long range solutions to the problem:

1) Much of the existing parking lot space in enclosed shopping malls will have to
be recycled into more productive uses. For example, the asphalt can be
recycled and used by municipalities to replace decaying road infrastructure.
The land can be re-tilled (if it is arable) to create community food gardens,
parks and pedestrian spaces. The labor can be culled from the growing un-
employed populations of municipalities to focus a sense of community rather
than isolation. To reclaim the mall as a true town center that fosters a sense
of community; but also a town center that is not indicative of the
consumerism of the 1950’s, but the environmentally conscious epoch of the
2010’s.
2) The roofs of most enclosed shopping malls should be turned into “green”
roofs that involve the planting trees (and even food crops) on the roof surface
to reduce the temperature of these roofs in warm weather and increase roof
shelf life beyond its typical twenty (20) year life span. Green roofs should
also significantly reduce utility costs which will increasingly become an issue
for both tenants and owners as CAM pass-through’s become more difficult
with continuing declining economic conditions. Green roofs also help in
decreasing flooding through reduced water run- off, carbon dioxide emission
reduction and esthetically will improve the appearance of enclosed shopping
malls, especially those with substantial anchor vacancies. Once again, the
municipality can be actively involved to supply labor and/or plantings in a
partnership with the mall ownership to work together to save a potentially
viable economic asset.
3) Mall Owners and Lenders will be negatively impacted due to a long run
reduction in retail tenancies in exchange for land re-development into viable
new concepts. Each mall will have to be evaluated on its own merits and
viewed in the current climate of general over-retailed municipalities and the
lack of discretionary income. The value of the mall may, in certain instances,
be the value of the land that it sits on, which in many instances, may have
declined in value substantially.
4) As mentioned in previous writings, mixed use re-development will have to be
planned for. Given the current economic climate, there is literally no
development money available unless projects are pre-leased with strong
tenancies and sponsorships. Nevertheless, the need for planning is
paramount to protect the substantial investments that have been made by
Owners, Lenders and in certain instances, Municipalities.
5) Owners/Lenders will have to be partners with both the municipality and the
community to determine the new “highest and best use” for a particular mall
 location. The need for office, industrial, workforce housing, senior or student
housing, medical, government facilities has to be evaluated seriously and
efficaciously.
6) Income has to be maintained as much as possible in the short run to keep
retail tenancies until malls can be effectively re-developed. A paramount
concern of ownership should be to maintain tenancies as long as possible
even if it requires creative solutions to accommodate the needs of both mall
ownership and retail tenants.
7) Expenses will have to be cut as much as possible to stabilize the remaining
income of a particular mall. The delicate balance between a “skeleton
operation” and the current institutional way of running enclosed malls will
have to be evaluated on a case-by-case basis as each economic situation is
unique. In many instances, the long run viability of a particular project may
not be an enclosed mall so the sooner the ownership conveys a sense of what
the mall is going to morph into, then the staffing needs can be better
identified and accounted for.

We are starting to see a widespread decline in the value of enclosed shopping malls,
especially in the B and C sectors of the market. Even Class A assets are beginning
to be affected. A recent trade of a Class A power center in relatively affluent
Westchester County, New York was at a nine (9%) percent capitalization rate for real
in-place net operating income (NOI). Prior to the downturn, as asset of this quality
might have sold for a 6-7% capitalization rate, so there was a 200-300 basis point
expansion in the cap rate; and this was for a Class A asset.

Class B and Class C enclosed mall assets have had even greater capitalization
expansion (and less actual trading activity) with projections of Class B enclosed mall
centers to be 10+% and Class C assets at 12%+ cap rates based upon real in-place
NOI. We are not necessarily speaking about community supermarket anchored
centers here as they are relatively less impacted due to their reliance on more
essential consumer shopping, i.e., food. Power Centers and Lifestyle Centers may
also be impacted almost as much as enclosed malls due to their reliance on often
non-essential retail needs. It will be interesting to see how power centers and life
style centers are impacted in this downturn as they have been touted as solutions
to the problems owners had been finding with enclosed shopping malls in general.

Symphony Property Group is an asset manager specializing in regional

enclosed shopping malls in the U.S. on a national basis. Symphony, in
conjunction with a major international real estate service provider, can
also perform receiver and property management functions as well, to
stabilize and re-develop enclosed shopping mall assets. Finally, Symphony
has recently set up an Auction division to offer accelerated marketing
services for Owners and Lenders that wish to quickly dispose of their real
estate assets.
For further information, contact:

Eric Kaufman at 914-205-3129 (ekaufman@symphonypropertygroup.com),

David Kopp at 203-829-9018 (dkopp@symphonypropertygroup.com) or
Howard Ervin at 301-512-0510 (hervin@symphonypropertygroup.com)

www.symphonypropertygroup.com
The Symphony Report Blog