Outside of Des Moines, Iowa, the 50-year-old Valley West Mall was once the region's “premier mall,” but it has suffered from years of store closures. Today, the enclosed shopping center that was built for 138 retailers has just 17 occupants left.

Last month, the 58-acre property sold for $11M, roughly 10% of its 2005 valuation. After the mall was held in receivership for four years, new owner Threshold Capital is planning a mixed-use transformation.

The redevelopment won’t be complete for at least a decade, but it could keep the deterioration of the mall from tanking the surrounding neighborhood, West Des Moines Community and Economic Development Director Ryan Moffatt said. 

“We've got to do something to stem the tide here,” he said. “Everything from the decline in retail sales to the decline in property tax valuation and the decline in traffic … you can feel it.”

Similar experiences are playing out across the nation in communities where malls that once served as thriving commercial hubs are facing economic distress — even as the overall sector has improved. Green Street reported last month that nationwide mall values were up 13% year-over-year, outpacing every other commercial real estate asset class.

But of the roughly 900 malls across the country, 90% of the value lies in around 250 properties the research firm categorizes as Class-A, said Green Street Head of U.S. Industrial and Mall Research Vince Tibone.

Beneath them, there is still a wide swath of distress, he said, particularly across the roughly 300 Class-C malls.

“A lot of malls are still struggling,” Tibone said. “Maybe most of the mall square footage is still in decline.”

Morningstar tracks 182 malls that are backed by 423 separate CMBS loans with balances totaling nearly $42B. Of those, 92 loans totaling $8.7B are in special servicing — an indication that a loan could be heading for trouble — and 42 loans totaling $3.4B are delinquent.

“There’s still a lot of mall distress out there to be seen,” Morningstar Managing Director David Putro said. “It’s definitely not going backwards.” 

“The better malls are going to see the benefits of value increases,” he added. “I expect to see a steady transfer of mall loans to special servicing over the next couple years.”

This dynamic has underpinned the strategy of publicly traded mall giants Macerich and Simon Property Group, which have given up on weak malls as they reinvest in top-tier properties.

Macerich relinquished Santa Monica Place to its lender in 2024 after defaulting on its $300M loan. Since then, the property has been under control of receiver Trigild, which tapped Prism Places to manage it.

The REIT has made new acquisitions in recent years, acquiring malls in affluent markets like Annapolis, Maryland, and Raleigh, North Carolina. It reported portfolio-wide occupancy of 94% last quarter.

“The scarcity of space in our best centers is by design. … No one is building new regional malls, and roughly 90% of our go-forward [net operating income] comes from Class-A assets,” Macerich CEO Jackson Hsieh said on the company’s second-quarter earnings call.

“We will remain patient and selective, but we intend to use this window because the conditions for acquiring and transforming high-quality malls are as favorable as we've seen,” he added.

Simon Property Group handed back a series of struggling malls after the pandemic devastated the sector, such as the Southridge Mall in Wisconsin and the Town Center at Cobb near Atlanta.

But in recent years, Simon has invested hundreds of millions of dollars to upgrade better-positioned malls, like The Mall at Green Hills in Nashville and the Cherry Creek Shopping Center in Denver. The REIT in Q2 reported occupancy of 96%.

While mall performance varies depending on the quality of the property, there is plenty of opportunity for landlords to invest in assets to meet today’s retail demand and keep their malls relevant, Colliers National Director of Retail Services and Practice Anjee Solanki said.

“We’re seeing leading malls evolve into true destinations, extending beyond the traditional enclosed format with Main Street-style retail, restaurants, entertainment, and other experiential uses that create more reasons to visit and spend time at the property,” she said in written responses to Bisnow questions.

That type of evolution occurred over the last few years at the largest mall in New England: the Natick Mall. 

Occupancy at the GGP-owned mall had fallen to 82% in 2022, and its CMBS loan was placed in special servicing ahead of a late 2024 maturity, but the mall in recent years has landed several new retailers: adult playground Level 99, Pokkido Indoor Playground, furniture retailer Raymour & Flanigan, and a 97K SF pickleball facility in a former Neiman Marcus space. 

The mall is now 92% leased, and its cash flow has jumped from $35.3M to $45.5M, according to Fitch Ratings. GGP had received an extension that pushed its loan maturity to next month, and it has lined up a new $400M loan that is scheduled to close Oct. 22. 

But these types of big refinancing deals are rare for malls, Putro said.

He highlighted the loan underpinning Simon’s Wolfchase Galleria, which entered special servicing last month even though it never went delinquent over the course of its 10-year term.

The property reported a debt service coverage ratio of 1.65 last year, but the current cash flow is 35% below where the loan was underwritten.

“There are a lot of loans that are performing well but mostly can never be refinanced. … That’s what I call the hidden distress,” Putro said.

“There’s just not really active capital markets for anything other than the best mall in each market,” he added.

That competitive regional dynamic is part of what doomed Valley West. Moffatt pinned much of the mall's decline on the opening of a new enclosed shopping center on the other side of West Des Moines called Jordan Creek Town Center in 2004.

In the era of e-commerce, many markets that previously accommodated two or more malls now only have room for one. 

“One way or the other, a lot of these will not be malls as we know them going forward,” Putro said.

Mixed-use redevelopments seem appealing from a bird’s-eye view given the nationwide housing shortage and the bargains some of these distressed malls present for potential buyers. As suburban communities have become increasingly built out in recent decades, their vast parking fields are often the last pieces of untapped land for major projects.

But it can be a fraught and challenging process.

Threshold wasn't the first company to attempt a redevelopment of Valley West. ATI Group was previously under contract to buy the property and planned to build housing and speculative office space there, but it ultimately didn’t move forward with the deal, Moffatt said.

The price tag kept going up as the sale process dragged on, and ATI needed to hire independent contractors for construction, which would have been a major expense.

Threshold has its own construction arm, which Moffatt said removes some barriers for the 300 to 400 apartments the company plans to build alongside a hotel, offices, an outdoor venue and an open-air boardwalk. But the new owner now has to contend with a restrictive lease agreement with the mall’s sole remaining anchor, JCPenney.

The contract inked in the 1970s and valid through 2032 gives the department store extensive control over any redevelopment of the property.

Threshold intends to carry out construction in a way that would allow JCPenney to remain open, but the developer has filed a motion in Polk County District Court to determine whether the department store can restrict development on the entire mall site.

Otherwise, Moffatt said he has seen broad support for redevelopment of the property as West Des Moines seeks to keep the area from falling into decline.

“It’s a doughnut hole in the economic vitality of a community that used to be very robust,” he said of the surrounding neighborhood.

“You don’t want to create an area that has a stigma associated with it,” Moffatt added.