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The 'Catch-22' That's Keeping Aging Malls Stuck In Limbo

Hundreds of shopping malls across the country require substantial investment to stay alive in today’s market, but disagreements over how much the properties are worth — even among professional appraisers — have left many of them sitting stagnant.  

Northern Virginia's Dulles Town Center mall, which sold in 2020 after going through foreclosure.

Redevelopments around the country have shown that dead malls can be revived by adding a mix of uses like multifamily and hotels, but those projects have only been undertaken at a small minority of U.S. malls. Developers who want to pursue more of these projects say the appraisal process has been a key sticking point holding up many potential deals.

Retail experts told Bisnow that appraisers aren’t bringing down the values of malls to what they are realistically worth because they can’t find enough comparable deals. As a result, fewer deals can be struck, and the cycle continues.

“It’s a real Catch-22 happening across the country,” Trademark Property Co. CEO Terry Montesi, whose firm has completed multiple mall redevelopment projects, told Bisnow last week at the National Association of Real Estate Editors conference in Atlanta. 

“Nobody’s selling anything, so there’s no comps, and appraisers just leave the values where they were, even though everybody knows the reason nobody’s selling anything is there’s no liquidity, they’re not worth hardly anything,” Montesi said. “Appraisers aren’t making a guess that a $300M mall is now worth $100M, even though everybody knows that.”

Without appraisers bringing down mall valuations, experts said many owners and lenders have been hesitant to sell assets at a low enough price to allow buyers to make redevelopment deals work. Existing owners have a hard time redeveloping their own properties because they largely bought them when mall values were significantly higher.

“The basis current owners have in these malls is generally an impediment to redeveloping them,” said CBRE Executive Vice President George Good, a retail investment sales broker. 

Rising interest rates are also making it harder for those owners to secure refinancing deals. Good said most of them don’t want to invest more of their own equity to redevelop a property, or even make minor upgrades, because they don’t think they can get a return on their investment. 

This dynamic means that mall redevelopments typically only occur when a buyer acquires a property at a much lower value than the previous owner, but industry insiders say these types of sales aren’t happening often. 

Without sales occurring in the market, nobody knows how much their mall is actually worth.

“It’s a really tough position for an appraiser to be in, because if you don’t have comparable sales that are relevant, how do you value something?” Good said. “If you arbitrarily say this mall is worth 80% of what it was worth last year, you’re going to be called on the carpet as much as if you say it’s worth what it is today.

“Based on conversations with appraisers, they recognize the values of some of these malls have declined, but it’s impossible to peg by how much,” he added. “The appraisers are cognizant. They’re not just leaving values where they were because that’s where they were; they’re trying to come up with some data that supports what the value should be, but it’s very difficult to do that when you don’t have significant trading activity.”

A significant number of sales is required to make accurate valuations, experts said, because attributes of the properties can vary widely, such as the amount of land available for development, the ownership structure of the department store sites, the design and tenancy of the mall, and the strength of the markets where they reside. 

“No two malls are the same, and that creates a problem,” Centennial Chief Investment Officer Carl Tash said. “You need a bigger pool of transactions on the mall side to have confidence on the appraisal side because there are very unique aspects to every mall that help or hurt the value. You need a lot more transactions than you’d need for suburban office or apartments.”

Centennial, a Dallas-based retail owner with a 23M SF nationwide portfolio, is pursuing several mall redevelopments. In 2020, it took over management of the Dulles Town Center mall in Northern Virginia after previous owner Lerner Enterprises went through foreclosure. That mall had been valued at $300M in 2008, but by 2020 its assessment had fallen to $55M. 

The Fairlane Town Center mall in Dearborn, Michigan, which Centennial acquired in May.

In May, Centennial acquired the Fairlane Town Center mall in Dearborn, Michigan, and the Shops at Willow Bend mall in Plano, Texas. Both assets were built by Taubman Centers and previously owned by Starwood but were placed in receivership within the last two years, Tash said. 

“I can’t get into the specific numbers, but we did acquire them for substantially less than either Taubman spent building them many years ago and Starwood spent in acquiring and then doing the work they did on the properties,” he said. “That’s just an example of where we feel like we got in at the right basis to allow us to now think about, 'How do you repurpose?'”

These deals happened after the malls had gone through receivership, but Tash said it is better for the properties and their communities if owners and lenders don’t wait until it gets that far. He said many properties are becoming obsolete because owners don’t want to invest more money into them, and then the malls become less attractive and sit for years with declining foot traffic and rising vacancy. 

“Hopefully, smarter lenders are looking at that and saying, ‘I ought to get a dose of reality sooner and not go through that whole foreclosure-receiver scenario. I’m better off moving the property earlier and getting the right price,’” Tash said. “That right price is going to continue to drop if someone’s not managing the property for today’s needs.”

Gautham Vadakkepatt, the director of the Center for Retail Transformation at George Mason University, said he has seen mall valuations fall “astronomically” in recent years. He said customers who can buy most products online don’t want to drive to malls unless it is providing a special experience, and many malls haven’t maintained a strong enough tenant mix to make it worth the trip. 

“That’s the key driver for why you’re seeing mall valuations go down is the customers don’t see the value that they historically have,” he said. “There are also geographical issues. Some areas have population declines.”

Montesi said he has seen malls in poor locations trade for less than a quarter of the debt the previous owner had on the property. 

“Many malls in this country, when they did their loan and put debt on them, the values were much higher than they are today,” Montesi said at the NAREE conference. “So many malls are overleveraged, and if you’re overleveraged, you can’t attract capital, and then you’re going to lose the asset to the lenders.

“We’re in the midst of a pretty dramatic basis reset for a lot of malls across the country."

Trademark Property Co. CEO Terry Montesi speaks at the October 2022 NAREE conference in Atlanta.

Montesi’s Trademark Property Co. is working on mall redevelopments in Annapolis, Maryland; Alpharetta, Georgia; and Dallas. And he revealed at NAREE that the firm was preparing to acquire the Lincoln Square property in Arlington, Texas. He said his strategy for that property would be similar to its other redevelopments: get rid of about 200K SF of retail space and add hundreds of multifamily units.

“There’s too much retail in this country,” he said. “Many centers are too big, and where the store of value is in today’s market is in multifamily.”

JLL Senior Managing Director Dave Monahan, a capital markets broker, said he has seen more mall sales over the last year than he did in each of the previous four years, but the vast majority of them have been driven by lenders that had taken control of the asset. 

“There are a lot of loans coming due over the next several years where currently there is no takeout financing available at the same debt level, so you get into a tough period where, in order to refinance, a borrower has to come out of pocket with potentially a meaningful amount of equity, and that may or may not be something they’re prepared to do,” Monahan said. “For the right asset, the borrower will do that, but not for every asset.”

Mall owners that took out loans at a higher valuation than their properties are worth today are also having a hard time putting in more money to keep their properties fresh, Monahan said. 

“With a product type like a regional mall that needs constant reinvestment, it can become difficult when you’re in a compromised equity position to justify the spend that’s needed, which could potentially create a stagnation period,” he said. 

With malls stagnating, CBRE’s Good said the parties involved in a property need to come to an agreement on its valuation so they can move forward with a plan to revive the asset.

“There are certainly examples around the country where the mall has suffered because of an inability for borrowers, lenders and other stakeholders to come together and say, 'Here’s what we’ve got, and here’s what needs to be done, and let’s do it,'" he said.