The Mall is Dead. Long Live Bricks-and-Mortar?

Recently, GGP shareholders approved the Brookfield Property merger deal by a wide margin. Sure they did. The value was reported to be in the range of a 6 percent cap rate, a number that any self-respecting, not fee-driven real estate owner would consider aggressive.

Yes, I have heard the commentary. The cap rate was on the low side because the properties are Class-a, located in great locations and therefore protected from the “retail apocalypse” (if that’s still a thing). Also, GGP has begun to convert many of these malls into more experiential facilities, which serves as proof positive that they will overperform in the new age of retail. Now that I mention it, what in fact is the new age of retail? Have retail tenants even settled on a proven new-age prototype around which we can build new-age properties?

For the record, brick-and-mortar retail will long outlast Amazon’s break-even flirtation with retail. That doesn’t change the fact that GGP’s portfolio does not represent the stable investment touted by the various commentators. I think the only question that remains is whether it is a redevelopment or a covered land play.

Something everybody in retail seemingly agrees on is that the department store is a new subset of endangered species. When Sears finally brings its going out of business sale to an end, all its stores will close—including the “class-A” locations. In 2009, the Wall Street Journal published an article titled Empty Mall Stores Trigger Rent Cuts, highlighting the effect of co-tenancy clauses on retail properties. This property-killing clause can be found in almost every retail lease, entitling tenants to rent reductions and even terminations if occupancy (including unowned portions) drops below a predetermined threshold. To quote the article, “The result is a ripple effect, as failures trigger co-tenancy violations, which in turn lead to canceled leases, more vacancies and more violations” and ultimately the demise of an otherwise healthy property.

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