Boston's Oversaturated Mall Market Is Being Hit Hard By The Retail Reckoning
The slow death of the nation’s malls has been accelerated by the coronavirus pandemic, highlighting America’s outsized footprint of physical retail. Almost nowhere is that more evident than in Massachusetts.
The U.S. overall is over-retailed, with more than triple the amount of retail space per person than Canada. Boston has the third-most shopping centers, including malls, as a percentage of physical retail among the nation's largest metro areas, according to CoStar data, and that exposure has led to a significant dislocation of mall assets in recent months.
“I know the Boston market extremely well, and there’s definitely become an oversaturation of retail and malls in the New England area,” JLL Boston Retail Advisor Steve Ferris said.
Boston’s suburban malls have seen valuation drops, foreclosures and properties handed back to their lenders, even as the area's stalwart Class-A properties hang on. Massachusetts’ high Covid rates, high unemployment numbers, flight from its dense urban core and some of the nation's tightest shopping restrictions have added to the woes.
The region has 24M SF of shopping centers, which make up 9.9% of its total retail supply, behind only Denver and Washington, D.C., among major U.S. metropolitan areas, according to CoStar.
The market grew behind developers like New England Development and WS Development who saw opportunities with the region’s higher-income population and built along the area’s Route 128 and Route 495 corridors, Ferris said. Major landlords Brookfield and Simon Property Group also hold significant area portfolios, although Simon's holdings in Massachusetts have shrunk.
Malls had already been challenged by the rise of e-commerce, department and retail store closures before recently the Covid pandemic deprived them of foot traffic. The reckoning blew up last year in Massachusetts when Covid arrived and brought with it a three-month shutdown of malls in the spring.
The state currently has the fourth-most Covid deaths in the nation per 100,000 residents, and unemployment dropped 8% to 9% over the past year. At one point last summer, the state had the nation's highest unemployment rate.
“Jobs were definitely affected a lot more in Massachusetts in this area,” CoStar Market Analyst Todd Galvin said. “That has a lot of influence on consumer confidence, pricing power, all these things that will affect overall retail sales.”
The economic effects hit mall operators almost immediately, with malls in Dartmouth and Walpole transferred to special servicing in June.
Simon’s 542K SF Square One Mall in Saugus, 10 miles north of downtown Boston, entered special servicing in July. Of Simon’s 13 Massachusetts malls, three were marked by the REIT as troubled assets, including the Emerald Square Mall in North Attleboro and Liberty Tree Mall in Danvers.
More recently, a CMBS loan on the Cape Cod Mall, partially owned by Simon, was sent to special servicing in February. Square One Mall last month also saw its valuation drop 75% from $201M at the time of its CMBS loan’s securitization in 2012 to $50.5M.
Simon has appeared to let its smaller assets, which generate a few million dollars in net operating income, fall by the wayside as its large, healthier Class-A portfolio lives on.
"From our standpoint, from an investor standpoint, it's the malls that matter that you really focus on," Piper Sandler Equity Research Managing Director Alexander Goldfarb told Bisnow last month. "Copley, South Shore, North Shore, those are the powerhouses. I’m sure the Saugus mall is a lovely mall, but there are [other] productive centers in the Boston metro."
But while malls have been failing in Boston’s denser-populated suburbs, many will likely find a second life in redevelopment plays because of their prime location, large plots, and traffic and parking controls, experts said.
“The malls that are failing in the denser areas are going to be repurposed, because all of these malls are great real estate,” Ferris said. “So the denser the population, the more likely the mall will be repurposed into residential, office, hotel.”
Simon flirted last summer with Amazon to convert now-vacant Macy’s and Sears to distribution hubs amid the e-tailer’s rapid expansion, while Brookfield has mulled the same. Massachusetts mall landlords appear to be increasingly embracing the conversion trend, with Finard Properties and Amazon recently getting approval from Worcester for an e-commerce distribution conversion at Finard Properties' Greendale Mall.
New England Development’s CambridgeSide, steps from the Kendall Square life sciences epicenter, is in the midst of converting the shopping center’s third floor to office use including 162K SF of rentable space. The property's transformation will continue with a total of 1.7M SF of new office, lab, retail and residential uses around the project site “in response to the area’s tremendous growth,” a spokeswoman said in a statement.
More unique solutions have appeared at Mountain Development Corp.’s Eastfield Mall in Springfield, which hosts a mass Covid vaccination site in a vacant Sears and will soon host trial courts in its abandoned movie theater.
“It works out good. They’ve got their own space there,” MDC Managing Director Chuck Breidenbach said of the court. “Theaters work particularly for courtrooms, I think.”
The developer is waiting out the pandemic to begin its $200M redevelopment into a mixed-use site, and in the meantime is collecting checks for the use of its vacant space.
Even for Massachusetts malls that aren't in immediate financial distress, landlords have caught the redevelopment bug, with projects for new residential and entertainment options at the Woburn Mall, Burlington Mall and Hanover Mall. Mall owners are also eyeing the dollars flowing in the life sciences sector; the operator of a Watertown Mall is reportedly nearing a $125M sale to Alexandria Real Estate Equities.
CBRE Americas Managing Director of Retail Asset Services Mark Hunter said most of the region’s malls are still great real estate, but they need to change with the times.
"The world is changing so quickly, that the good malls are just going to get better, I think," Hunter said. "And the ones that have been repositioned because of changing demographics or unfortunately losing a few department stores, they’re going to have to reinvent themselves."