Contact Us

For Class-B Malls, The Future's Uncertain And The End Is Always Near

Now that the worst of the coronavirus pandemic appears to be over, U.S. Class-B and lower malls are finding their new normal as well, which happens to be much the same as before. More closures, significant erosions in value and new owners looking for the best ways to redevelop the sites, which don't necessarily include retail uses, mark the property type.

Redevelopment into industrial or other uses will be the salvation of only a fraction of dying Class-B malls in the years ahead, retail investment experts say. The real risk in the sector now is that some former malls face years in commercial real estate limbo: not fit for retail — or much else, either.


"We have to split the Class-B malls into buckets," Bloomberg Intelligence Senior E-commerce Analyst Poonam Goyal said. "There are probably about 250 malls that would be considered B malls right now. Do we need all 250 of them? The answer to that question is no."

The pressure on Class-B and lower malls in the 2020s is going to be relentless, Goyal said. E-commerce will continue to grow, especially in the form of social commerce. 

"The ability to buy on Facebook, Instagram, YouTube and other image-based platforms is going to become much more prevalent in the next five years, adding even more to e-commerce growth," Goyal said. "There's simply going to be no place for a lot of Class-B malls."

Just how many will remain is up for debate, but it isn't a rosy picture for many lower-level malls keeping their shape and function. CBRE Research predicts the contraction of as much as 20% in total U.S. retail space by 2025, with most of the drop coming from the closure of Class-B and Class-C malls. 

Mall valuation continued to drop during the pandemic, with Class-B and lower-quality properties decidedly feeling the worst pain, especially those malls in secondary and tertiary markets, DBRS Morningstar reports. Higher-quality properties, on the other hand, are able to make capital investments to broaden their post-pandemic appeal.

Only a few mall loans have been transferred to special servicers since the beginning of the pandemic (nine out of 150 from the 2017-2020 vintage), DBRS Morningstar reports. But their collateral still saw significant value declines, dropping an average of 48% compared with issuance during the pandemic.

Value declines have been even more pronounced for loans originated during 2013-2016, averaging a 60.1% drop. That is because the 2017-2020 loans were underwritten with an average loan-to-value ratio of under 45%, compared with 54% for the older loans.

Closures will continue to impact valuations. The Square One Mall in Saugus, in metro Boston, saw its valuation drop from $201M at the time of its CMBS loan's securitization in 2012 to $50.5M in early 2021. The Dover Mall in Delaware, valued at $129M in 2011, was valued at $41M in February, and The Mall at Tuttle Crossing in Dublin, Ohio, saw a 2011 valuation of $240M dwindle to $80M only a decade later.

Closing anchors is the main ongoing risk for mall values, Green Street reports, estimating that about 360 mall-associated department stores have closed since 2016. About half of remaining mall-anchoring department stores are doomed to close by the end of 2025, the company predicts, many of them anchoring Class-B properties.

Despite grim prospects, there is a post-pandemic investment market for Class-B malls. After reductions in valuations, some of them do have a future as retail of some kind, depending on local market factors. 

"Class-B malls have been selling year after year as REITs unload their noncore assets and lenders who have taken them back have been selling assets," said Newmark Vice Chairman Thomas Dobrowski, a specialist in brokering enclosed Class-B mall assets as well as open-air and outlet centers. 

"With the pandemic, there was a pretty significant drop-off in velocity last year, but there were Class-B sales in 2020, mostly assets earmarked to be sold pre-pandemic," he said. "Now, in 2021, we're seeing an uptick in activity."

In "normal" times, somewhere between 20 and 30 malls trade a year throughout the United States, Dobrowski said, making the trades relatively easy to track. 

"This year so far, I'd say about half a dozen Class-B and below malls have been brought to the market, and we were responsible for the sale of the three of them," Dobrowski said

In February, Newmark brokered the sale of the 862K SF Centre at Salisbury in Salisbury, Maryland, on behalf of Brookfield in a short sale.

"We were selling it with approval from the lender," Dobrowski said. "That mall had a lot of the issues that a lot of other malls have, especially the loss of anchors, and it frankly wasn't worth the loan amount, so the sales price reflected that."

Investors considered the mall viable as retail, just not worth its previous valuation, Dobrowski said. That isn't an unusual scenario: Class-B malls are trading, but at a price that needed to be reset.

"They're being purchased to be run as going-concern malls, but valuations are being taken down to a level where the new owners can sustain tenancy, lease up space and deploy capital to turn the asset around," he said.


"Class-B mall investors are taking a number of factors into consideration," CBRE Executive Vice President George Good said. "Is there a reciprocal easement agreement that's going to prohibit you from executing on a repositioning plan? Is this a market that has other local demand drivers?"

Good cited a March deal in which Industrial Commercial Properties bought the Chapel Hill Mall in Akron, Ohio, with plans to convert it into an industrial business park.  

"There was a demand driver for industrial there, so the sale made sense for the investor," Good said. "But there are other malls in secondary and tertiary markets where you don't have that similar local demand drivers.

"Then there's the municipality to consider. If a mall has historically been the biggest tax generator in the community, and if officials don't recognize that's coming to an end, that's another hurdle to get over."

Another sticking point with retail redevelopment is the prospect of write-downs in value, especially for converting mall sites into distribution centers, a process that gained popularity during the pandemic as demand for distribution mushroomed.

Converting a mall into an e-commerce warehouse could reduce its value anywhere from 60% to 90%, Ryan Preclaw, a research analyst at Barclays, told CNBC’s Worldwide Exchange in October.

"There's a limit to how much of that space needs to be turned into e-commerce warehouses," Preclaw said. "The issue is that Amazon, in terms of generating dollars per square foot, is much more efficient than a retail space."

With redevelopment even into industrial, the hottest asset class, no sure recipe for success, other investors are taking a wait-and-see approach to malls.

"We're watching that sector very closely and have no interest in buying malls right now," Walker & Dunlop Investment Partners President Sam Isaacson said. 

Walker & Dunlop Investment Partners is at work on a redevelopment of a retail site in Macon, Georgia, that involves the conversion to industrial of four former big-boxes of about 400K SF, plus the addition to the site of two more industrial properties totaling 160K SF.

"Industrial parks tend to be very big and in consolidated locations, but when you redevelop a retail site, that can leave you with a kind of random industrial property in the middle of a metro area," Isaacson said. "That's the case with the Macon redevelopment, and leasing is taking a little bit longer than we expected."

"Certain malls probably will stand the test of time, but the majority of them in this country are obsolete," Isaacson said. "Still, there can be value from the land. It really depends on the site, and we've always seen a pretty broad array of different business plans for different malls."