By Jim Costello on February 5th, 2019
Inevitably at this time of year we will see numerous stories suggesting the death of the retail property sector. These stories will highlight that retailers are closing underperforming stores with the implication that the value of retail properties will fall. The variation in pricing in the mall sector in 2018 throws cold water on that death-of-retail notion, however.
The mall segment of the retail sector is where the death-of-retail view is heralded most loudly. Despite these death proclamations, sales involving malls was where the action was in 2018. How can one square the fact that mall deal volume was up 846% in 2018 with the mantra that malls are dead?
One of the challenges that investors have when trying to understand the mall market is that the data on property sales often only covers assets trading out at the bottom of the market. Indeed, looking at the distribution of mall pricing in 2018, there were three distinct pricing stories for the year.
In our analysis of deal volume, we include all sales: portfolios, entity-level acquisitions and single asset sales. What we do not include, but has pricing data, is refinancing activity. As shown in the chart, many assets that refinanced in 2018 skewed towards the high end of the price distribution, with 46% of observations being appraised for $600 per square foot or more. Many of these are the best-of-the-best malls with firm tenancies tied to high-income consumers.
On the other end of the distribution, single asset sales are skewing towards the low end on pricing: 58% of these deals transacted at $40 per square foot and lower. These are malls built in the 1960’s and 1970’s, that are on their last legs with empty anchor pads and face deferred maintenance issues.
In between these extremes are many of the malls sold in the entity-level transactions of 2018. Pricing for these assets does not enter our analytics, such as the RCA CPPI, since we do not have the exact figures on the price paid for every asset. We know the prices for the portfolios and make our best judgement on how the investment would be allocated to each property given local characteristics. We estimate that half of these malls involved in the entity-level transactions in 2018 would be priced between $240 to $380 per square foot.
The story here is that the mall sector is not dead and there is a great disparity in pricing. Retailers often close underperforming stores early each year after the last profits can be taken in the holiday spending spree. The closing of stores is equated with the pricing of some of the worst-of-the-worst assets and used to paint a negative story about the sector overall. However, the market is more diverse, with the best-of-the-best assets rarely trading. The entity-level transactions of 2018 show us that there is still value in this sector.
This article first appeared in the 2018 Year in Review edition of US Capital Trends. If you are interested in learning more about RCA’s publications, data and tools, please contact us.