It’s no secret that the COVID crisis has hit much of the commercial real estate sector extremely hard. For many regional malls—especially B and C malls that were already struggling—the impact has been devastating.
B and C mall assets were already facing the largest challenges in the regional mall space, with underlying structural problems that existed well before COVID. An evolving retail landscape and competition from e-commerce have taken a real toll. While the pandemic may have been a crushing roundhouse, the fighter was already reeling before the blow landed.
The result is a long list of mall properties that have been crippled by shutdowns, quarantines, capacity limitations, and large pandemic-driven drops in brick-and-mortar spending from consumers understandably leery of the health risks of indoor shopping.
What options do mall owners and operators have? How can sound management and possible repositioning options help transform struggling malls into community assets?
Problems and solutions
With so many struggling retailers, the urgent challenge of the moment for mall owners and operators is to try to stabilize rent rolls, maintain occupancy, and stabilize revenue base—all of which is quite challenging in a climate where you have retailers filing for bankruptcy on a regular basis. Many retailers have simply closed and gone out of business, and surviving retailers are coming to landlords with what can feel like an endless succession of requests for rent abatement or concessions. Others are downsizing, or asking about restructuring from base rent to a rental model based on sales percentages.
From the standpoint of an operator/landlord/receiver, the main objective is obviously to keep the lights on by working with retailers and coming up with solutions that work for both parties. Due diligence is an important part of that, including research and vetting to determine just how serious a tenant’s financial pain really is. Unfortunately, there will always be some parties who are opportunistic and will try to take advantage of the environment to secure more favorable terms.
Complexities and considerations
One nettlesome challenge with malls, in particular, is that the operator doesn’t always control all of the real estate: anchors are often separately owned. Because their occupancy is highly influential to co-tenancy issues, turning a struggling regional mall around can at times be like trying to stabilize a very sick patient in the ER when there are lots of comorbidities that limit the kinds of treatment you can apply.
On top of normal maintenance, limiting expenses, and trying to stabilize rent rolls in the midst of a pandemic, operators (especially receivers) also have to keep a close eye on what’s next. Will the mall be able to keep going? Will it need to be re-tenanted, redeveloped or repositioned? While smart owners are working closely with civic authorities in many cases to determine the best way forward, that relationship can be complicated by the fact that it’s not uncommon for local officials to take more time to fully accept that there are some malls that won’t make it without big changes. Municipalities must recognize that most struggling malls are in trouble because of underlying structural problems: fundamental market shifts or a less-than-ideal location. Simply adding more retail won’t necessarily move the needle, and sometimes changing or adding uses can be the best or only way forward.
Partners and possibilities
Municipalities would be wise to be flexible in considering how to approach the adaptive reuse of some of these properties. The key is to understand the market and identify the highest and best use of space—recognize that that isn’t always going to be the “most glamorous” answer.
The good news is that there are lots of repositioning options out there. While transforming an enclosed mall into an open-air lifestyle center or revitalized mixed-use destination is an option in rare cases, B and C malls are more likely to benefit from a more creative redevelopment or repositioning. Among the many solutions that have been used to replace some or all of underperforming mall space are office, residential, and hotel components, senior centers, sports complexes, recreational arcades or facilities, self-storage, medical uses or clinics, and educational facilities. Industrial remains one of the hottest sectors of the commercial real estate market, and industrial last-mile facilities are in particularly high demand. Malls, with their close proximity to large numbers of rooftops, are a natural and attractive repositioning target to meet that demand.
While some municipalities may hesitate to embrace some alternate uses, some of those uses can be tastefully integrated in ways that are attractive or understated and that preserve the aesthetic or experiential integrity of the site. In some cases, a new use is simply a perfect financial fit. An ambulatory surgical center / medical office building in a former JC Penney, for example, can likely be done at a price point that would have been impractical or financially unworkable in different circumstances.
With so many mall properties impacted by the pandemic, experienced full-service receivers are in high demand. A proven expert in this space, NAI Farbman offers a full-service platform of receivership, property management, leasing and disposition expertise. Extensive experience in the distressed regional mall space means that NAI Farbman can deploy quickly, and knows how to efficiently operate an asset while identifying cost savings and maintaining quality. NAI Farbman professionals know how to stabilize the rent roll, and our experienced leasing team understands how to get the highest and best use of space.
Just as important as maintaining newly efficient and financial sustainable operations is NAI Farbman’s willingness to not only talk to tenants and municipal authorities, but to reach out to all stakeholders in the community to hear about their ideas and priorities for adaptive reuse possibilities. In many cases, our team determines interest from non-traditional users and passes that information on to the next owner—helping to plant the seeds of success and point the asset in the right direction. In the wake of a historic pandemic, a stable asset—optimized for future success in a recovering economy—stands out as a success story in this critical, but hard-hit industry segment.
If you’re interested in receiving a complimentary, no-obligation commercial real estate consultation, contact Farbman Group and get in touch with an expert today.