How Some Malls Manage to Stay Alive Years After Losing Their Mojo

By Esther Fung Features Dow Jones Newswires

The U.S. has far too many malls scrambling to attract consumers at a time when online shopping is tightening its grip.

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That doesn't mean middling malls will die quickly, however.

Projections for hundreds of shopping centers to close in the next five years could prove too pessimistic. A more likely outcome, analysts said: many weaker malls will turn into zombies, staying open for years as they cycle through increasingly less successful retailers before finally being repurposed or leveled.

"It takes a very long time to transition these malls," said Thomas Dobrowski, executive managing director of capital markets at real estate services firm Newmark Knight Frank. "They don't die of heart attacks."

Part of the reason for weak malls' persistence lies in contracts signed years or decades ago. Landlords typically strike leases of 10 or 20 years with multiple tenants, making speedy exits difficult. In some cases, lease buyouts can be negotiated, but the process can be expensive and lengthy.

Owners hoping to close malls and redevelop them for other uses might also run into regulatory hurdles. Getting buy-in from the local community takes time and rezoning approvals might not happen, especially in areas where sales tax revenue makes up a big chunk of the local government's budget.

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Of the 41 malls Mr. Dobrowski has helped to sell since 2012, most of which were distressed sales, only one, Granite Run Mall in Media, Penn., has been closed and redeveloped. The others are still operating as malls.

The two-story Granite Run Mall was foreclosed on in 2010 after struggling with vacancies. It was sold in 2013 to BET Investments, which is redeveloping the site into a mixed-use property with open-air retail, entertainment and roughly 400 apartments. The demolition started only in 2016 as the firm waited for leases to expire and for government approvals for the redevelopment.

"You can't just tear it down while tenants are in there," said Bruce Toll, principal at BET Investments and a co-founder of home builder Toll Brothers Inc.

Roughly 200 malls have closed since 2007, according to Newmark Knight Frank. But the amount of square feet of retail space has increased 10.4% over the same period, according to data from CoStar Group. Part of that is due to the continued development of mixed-use centers in urban markets, but the steady growth in supply is also partly due to the slow pace of demolishing or transforming struggling malls for other uses.

Between 2007 and 2016, at least 275 enclosed malls, strip malls and open-air shopping centers were foreclosed on after their owners ran into difficulties repaying their securitized mortgage loans, according to data from Trepp Inc. Most of the properties live on as retail entities, with some adding medical clinics, tax and insurance offices, and gyms to their tenant mix.

After foreclosure, distressed retail assets are sometimes sold at rock-bottom prices. Some owners do minimal work on their newly acquired shopping centers because operating them at high vacancy rates might still be profitable given lower property taxes and lower property maintenance bills.

Other landlords might be compelled to improve properties, buying out leases from tenants that have fallen out of favor and renovating the vacated space. Some retailers or restaurant owners on the fence of whether to stay open might be persuaded to remain even if vacancy rates go up during the renovation period.

"If you buy these assets dramatically below replacement costs and become one of the lowest cost providers of real estate within a region, you can repurpose these shopping centers for alternative uses," said Andy Weiner, president at Houston-based real-estate investment firm RockStep Capital, which invests in shopping centers in small-town America alongside local businesses. Partners are aware of the regional and local issues and are able to identify substitute tenants such as entertainment, fitness, government offices, hospitality uses, he said.

But it can take time.

"There are some places where a mall shouldn't have been built but has existed for 20 years," said Brian Landes, a director at real estate services firm Transwestern Commercial Services.

Write to Esther Fung at esther.fung@wsj.com

(END) Dow Jones Newswires

October 17, 2017 09:14 ET (13:14 GMT)