So what do you do when your business has entered a period of secular decline due to changing consumer trends which has created an environment of massive oversupply and no pricing power? Well, if you're the once-bankrupt commercial REIT, General Growth Properties (GGP), then you build a brand new $525 million mega-mall and make the problem even worse. Per The Wall Street Journal:
On a bright August morning, GGP Inc., one of the country’s largest mall operators, broke ground on a new shopping mall.
“We’re not building any more,” said GGP Chief Executive Sandeep Mathrani. “This could be it for a long period of time.”
The seemingly risky bet on a new mall comes as retailers close hundreds of stores and malls across the country try to reinvent themselves. While GGP saw an opening to fill what it deemed an underserved area in Norwalk, Conn., about 50 miles north of New York City, it could be one of the last malls of its kind ever built in the U.S.
The $525 million SoNo Collection, as the new mall will be called when it opens in 2019, will be anchored by Nordstrom and Bloomingdale’s and house 80 to 100 smaller stores, including as many as 10 restaurants and potentially a health club. One change from malls of the past: There will be far fewer apparel retailers. GGP has pre-leased about 60% of the available space.
All of which has given GGP shorts a brand new reason to celebrate...
Something else for shorts to cheer! pic.twitter.com/FWMPGqUGqN— Simon Colvin (@Simon_MSF) October 25, 2017
Of course, as we pointed out earlier this year, this move from GGP comes as malls all over the country have been forced to replace once-dominant department store anchors with grocery stores, doctors offices, libraries and even a high school (see: America's Desperate Mall Owners Turn To Grocers, Doctors & High Schools To Fill Empty Space).
Natick Mall in Natick, Mass., is leasing 194,000 square feet of space vacated by J.C. Penney Co. to upscale grocer Wegmans Food Markets Inc., which is planning to open a store in 2018.
College Mall in Bloomington, Ind., plans to bring in 365 by Whole Foods Market in the fall.
Grocery giant Kroger Co., meanwhile, has purchased a former Macy’s Inc. location at Kingsdale Shopping Center in Upper Arlington, Ohio, and plans to build a new store in its place.
Beneath some positive stats, shopping malls are facing serious problems that threaten their health, including a shift to non-retail tenants and forecasted rent declines, according to Wells Fargo analysts.
Wells Fargo stresses a need to look deeper at high mall occupancy rates. Occupancy for the fourth quarter of 2016 was 93.6%, near the 93.3% for all of 2015, according to data from the National Council of Real Estate Investment Fiduciaries, cited by the International Council of Shopping Centers. However, the type of tenants many malls have is shifting to a lower-quality occupant for the overall health of the retail-focused mall, the analysts said.
"[F]or example, there are far more ‘mom-and-pop’ stores, and some malls have repurposed space for non-retail uses such as doctors offices, town libraries and even a high school,” Wells Fargo said in the report published Sunday. “Mom-and-pop” retail in a mall setting may generally be seen as a more-vulnerable long-term tenant and less of a traffic pusher without big-name brand backing.
In a testament to just how 'unique' GGP's new project is, only 6 malls have been built over the past decade as most REIT's, despite cheap financing, have acknowledged that their industry just might be saturated.
U.S. mall development peaked in the 1970s and has steadily declined. Just six large malls were built between 2006 and 2015, compared with 54 during the previous decade, according to Green Street.
Mr. Mathrani said the death of shopping malls has been exaggerated. GGP has leased nearly 10 million square feet so far this year, up from 9.5 million for all of 2016. But he concedes there is a wide variance between the top-rated malls and weaker properties. For instance, foot traffic rose 1.4% at GGP’s high-end A malls for the first six months of the year, but was flat at its midtier B malls.
That said, as the Journal points out, GGP seemingly admitted the foolishness of their new construction upfront by upending industry-standard lease agreements to allow them to replace Nordstrom and Bloomingdale's at some point in the future with a grocery store. And we're almost certain that grocery store will be more than willing to pay the same rent to sell a $2 gallon of milk as Nordstrom would pay to sell their $1,000 purses.
GGP is also upending the standard formula. Only about 30% of the SoNo mall will contain retail chains, reflecting a shift in shopper spending away from clothing toward beauty, health and fitness and entertainment.
The developer had to make other adjustments as well. It abandoned a proposed hotel and it changed the definition of “anchor” to give it the option at some time in the future to replace Nordstrom and Bloomingdale’s with tenants such as a supermarket or sporting-goods chain.
But sure, there's absolutely no downside to perpetually low interest rates...