Looking At Opportunities In “B” Malls

Mall productivity is on the rise again, and with “A” malls trading at astronomical prices, “B” properties are attractive for the savvy retail investor.

Jeff Green

For some time now, experts have been saying that traditional malls are dying. And, certainly throughout the recession, we saw a number of them struggle to stay alive through the mass exodus of tenants. As we emerge from the rubble and steadily move into recovery, we see that most malls did survive. In fact, most of them not only survived, but also are now being heavily pursued by investors.

Many malls are still vibrant community centers, retail destinations and traffic generators. In 2010 mall productivity rose for the first time since 2007, with sales jumping to $469 per square foot, according to Customer Growth Partners. This may be partly due to the emerging economic recovery and to the almost complete absence of new mall construction over the past 5 years. These factors, coupled with a push by national retailers to expand again, point to renewed opportunities in the mall space for the many private equity firms, pension funds and foreign investors eager to invest in retail.

Most seem to only be interested in “A” malls, those the industry defines as the prime malls in a trade area with sales of roughly $500 or more, per square foot. The problem is, there are only so many “A” malls for sale. And, because demand is higher than the current supply, most are no longer being sold at “bargain” or even affordable prices.

So, where should investors turn? To “B” malls, those defined as a secondary mall with sales of about $375 to $500 per square foot. Right now, “B” mall supply is much greater than that of “A” malls. Indeed, the “B” mall may be a bit riskier investment, but if you have a team with an aptitude for creative leasing and marketing with an eye toward adding value, your investment could give you far more room for profitability than the overpriced “A” mall alternative. Some publicly-traded REITs have confirmed they are marketing, or plan to market, some of their non-core assets, or “B” centers. Many of these and other “B” properties offer solid value propositions.

Certainly not all “B” malls are created equal, nor do they offer the same potential value. Many suffer one commonality: too much small-shop space. Oftentimes this is the culprit for their lower sale price per square foot. The good news is investors can usually reconfigure these small shops into larger spaces that may be ideal for those major retailers shrinking their big box stores. “B” malls can also be ideal for retailers who have not previously been mall tenants, especially when they can get prominent storefront “face space” near conspicuous mall entry points and have considerable parking available. Barnes & Noble was among the first such retailers to make this shift, now Best Buy and others are following suit. Presently, even Walmart, Target and Costco are going into some “B” mall locations. These leases not only fill large blocks of space, they establish new consumer patterns and create cross-selling opportunities for other mall merchants and restaurants. At malls in Europe and Canada, major supermarkets and mass merchandisers such as Tesco and Sainsbury have anchored mall properties for decades and have had great success doing so.

While investing in a “B” mall may not be as cut-and-dry as the purchase of an “A” property, many “B” malls could actually be hidden gems. A lot of them were built at “A” locations on great real estate along major interstates and typically have well-patronized restaurants, strip centers and power centers as neighbors on ring roads. These malls are not unlike the village retail concepts of old, when a city’s shopping hub was downtown and served as a magnet for peripheral business growth. Though these “B” malls may no longer be the demographic center of an affluent area, they typically enjoy terrific visibility and draw substantial, steady commerce.

The key is thoroughly understanding an asset’s short- and long-term opportunities and risks, keeping in mind that risk is inherent in any investment. Investors must be careful to determine if the “B” mall they’re considering has adequate lease-up or repositioning potential, and if any lease contingencies of existing tenants jeopardize or limit their ability to lease to other major tenants. They must also be aware of any non-retail uses the existing tenants consider problematic, and ascertain any other challenges that could result in major rent reductions or lease limitations.

With continued tightening of lending belts, investors will need to have a detailed action plan showing where clear value can be added to the “B” mall. Value can be added in a number of ways, from renovation and re-tenanting to re-formatting or partial conversions to non-retail uses like entertainment, healthcare or a school. As long as the investor performs thorough due diligence on the acquisition and the lender can understand the dynamics of the marketplace, there is no reason a well-conceived plan, backed by the right team, can’t work.

In past real estate cycles, some savvy companies benefited richly from the industry’s pre-occupation with “A” malls by snapping up and repositioning solid “B” assets. In 2004, CBL & Associates profited substantially from the select “B” mall properties it bought, which were a well kept secret at the time. Once again in this cycle, investors could very well make a killing on “B” malls. With interest rates at record lows and cap rates nearing pre-bust levels, there is no better time to consider investing in “B” malls.

Jeff Green is president and CEO of Jeff Green Partners, a retail feasibility development consultancy based in Phoenix. He can be reached by email at jgreen@jeffgreenpartners.com.