RCA Insights

Don’t Paint All Malls With the Same Brush

By on March 28th, 2018

The GGP acquisition by Brookfield surprised some as the generally accepted reality in the investment world is that U.S. malls are dead because the internet has eaten their lunch. This viewpoint overstates the trauma in the mall sector. There are assets that are still performing well and achieving great pricing even as some falter.

As shown in the following chart, there was a wide variation in price performance for the mall sector in 2017. There was a big clustering of sales in the range from $5 to $20 per square foot and these are the malls that get the attention in the press and are close to dead. There is a smaller but interesting group at the opposite end of the pricing scale, with prices running from $400 to $800 per square foot.

1803 Costello malls Main-01

Clearly there are still malls in the U.S. where investors are willing to step up to pay high prices and they would not be doing this if these malls were not performing well. There are two factors determining the variation in prices here and these factors are highlighted in my own patterns of shopping. I made two mall trips this weekend: one to a mall by the World Trade Center in Manhattan and another to the mall below my building in Brooklyn. Both of these retail centers were packed with shoppers.

First, each of these New York malls is quite new. The cluster of assets in the lowest end of the price distribution for 2017 tend to be 40 to 50 years old. Every old mall is not worthless – some have great location benefits and are surrounded by wealthy suburban communities – however many malls of this vintage were built to satisfy local economies that have changed. Newer malls are achieving higher pricing as they are better situated to fulfill the needs of consumers today.

Second, the malls I was shopping at were located in one of the most dynamic local economies in the world. It is good to be near consumers with jobs. Many of the price observations on the low end of the spectrum in the chart were for assets in the Midwest built to satisfy the needs of manufacturing workers back in the 1960s and 1970s. Malls that had been anchored by the likes of Montgomery Ward, Wieboldt’s, JC Penny and Sears face existential risks in the Midwest.

Investors and lenders are missing out on opportunities if they think that all malls in the U.S. are like the brown tile and burnt orange Midwestern malls where I spent my teenage years. There are malls which are achieving healthy pricing today, pricing which reflects the fact that people still like to shop and not everything happens online.

Jim Costello

Jim Costello

Senior Vice President

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.