The solvency of shopping centers again in the center of attention

When news broke last week that mall operator Washington Prime Group was considering bankruptcy, few, if any, observers in the commercial real estate or retail industry were surprised. After all, WPG had been trending down since 2014 and had been demoted further to junk status after missing a bond payment in early February. Add the fact that two other mall operators – CBL Group and PREIT – had taken a similar route of creditor protection just three months before, and WPG’s fate not only makes more sense, but also suggests that a post-COVID shift to a shopping mall Creditworthiness may be at stake.

With the worst of pandemic stress likely now behind us, and the herd of brick-and-mortar store chains drastically wiped out over the past year, there’s finally enough leeway to refocus on one problem. which has long plagued the retail industry. before the advent of COVID.

Too much space

To be sure, the pace of the increase in e-commerce and the decline in department store sales accelerated during the pandemic, and the additional retail bankruptcies, key tenant closings, and location reductions seen in the United States. the past 12 months have only exacerbated the problem for retail business owners.

Commercial Real Estate Consulting Green Street Advisors has long argued that the United States is “over-marketed,” with far more retail square meters per capita than any other country, and is among the companies that expect it. than 30 to 35% of existing shopping centers Close.

Green Street believes that the value of shopping center assets fell about 45% from the 2016 peak, while the valuation values ​​of shopping centers fell only 15%, possibly due to a scarcity of transactions, ”the company said in its US Mall Outlook 2021. It’s a complex way of saying that this is not a sellers’ market right now, and that any forced liquidation would produce questionable returns.

“Real estate funds would likely experience a significant depreciation / devaluation charge associated with selling a mall at current clearing prices,” said Vince Tibone, senior retail analyst for Green Street. “A more palatable move appears to keep assets and hope the outlook for shopping centers improves.”

Reinvent shopping centers and redesign space

In the words of Washington Prime CEO Lou Conforti in his company’s third quarter letter to investors, “It is certainly no easy task, [but] WPG believes our redesigned assets are an integral part of this proposition. “

The problem is, while re-imagining or reallocating empty or underperforming commercial space is a widespread aspiration, the real cost of remodeling a property, the time it takes to complete the work and find new tenants, then implementing the plan is considerably more difficult.

That said, there are sometimes stories of retail transformation – like Discover Financial last week which agreed to turn an empty Target store on the south side of Chicago into a giant call center – but they are the. exception rather than the norm. From a purely business perspective, such reallocations do little to improve the overall attractiveness of a shopping complex – and, in fact, could actually hurt it. “Transforming a closed mall into an e-commerce warehouse or residential complex could reduce property value by 60% to 90%,” noted a recent report from Barclays.

The two sides of the trend from retail to industry / warehouse

In July, global property management firm CBRE released a report that signaled an accelerating trend of property conversions, while the Wall Street Journal reported in August that Amazon and mall owner Simon Property Group were in talks to convert Sears and JCPenney into distribution centers.

“Commercial to industrial property conversions are accelerating in the United States, driven by the growth of e-commerce. There are now 59 such projects that have been completed, proposed or are underway since 2017, up from 24 in January 2019, ”says the CBRE report. “These projects total approximately 13.8 million square feet of retail space converted to 15.5 million square feet of industrial space.

While this is certainly a significant increase and a lot of space, rival real estate firm Cushman & Wakefield said in December that the “trend” was in fact just a “mere sliver” in the market. grand scheme of things. “The general public seems to think this is a sure thing, with many people assuming that much of the vacant retail space will ultimately be warehouse or industrial space,” the report said, while pointing out a wave of speculation sparked by a pandemic regarding the conversion of vacant homes. retail space in distribution centers or last mile facilities.

“The cases of retail to warehouse conversions are only a small part of the total number of new industrial deliveries,” the Cushman report said, noting that 1.4 billion square feet of new industrial supply has since become available. 2016 – of which 80% were logistics properties – “conversions from retail to warehouse [made up] less than one-tenth of a percent (0.073%) of total industrial inventory.

So what is working?

A roundtable in February titled “Exploring the Mall of the Future” took a fresh look at an old problem, which included the benefit of knowing the latest vaccine news and solid retail sales data. According to panelist Steve Plenge, Managing Director of Pacific Retail Capital Partners, when it comes to ‘carving up’ old big box stores, there are often significant municipal hurdles, as well as the rights of existing tenants and shared landlords. who have a say in any change through Reciprocal Easement Agreements (REAs).

“Most often when you plan to reuse these [properties] from the point of view of demolishing them and considering bringing in mixed-use, multi-family or office housing, or someday bringing back hotels, these are all things we’re looking at, ”Plenge said. But when it comes to creating a vibrant destination where people want to visit, Plenge said that “open spaces, parks, places to gather – these are draws, this is a new reason to come to these sites. , to have a place to go out, to have a place to develop restaurants around these green spaces.

“Farm markets are off the charts,” noted panelist Lee Peterson, executive vice president of thought leadership at retail design firm WD Partners – as is consumer demand for grocery stores, open spaces, and retailers. intelligently configured green spaces, food halls and traffic and parking – to facilitate increased BOPIS / BORIS (online purchase / in-store pickup) opportunities. “There are a lot of different things that consumers love,” said Lee, “and I think we’re going to have to do that in the future to increase the number of visits to malls.”

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Peggy P. Gilmore