Apartment Investors Mull Opportunities in Distressed Malls

Developers have proposed to redevelop more than a hundred malls into mixed-used properties with apartments.

Apartment dealmakers may find an opportunity to build new apartments around the shells of under-performing or empty regional malls. Hundreds of troubled shopping malls may be seized by lenders over the next year, experts say.

“In the current market with the pandemic, the number of properties considering this kind of redevelopment has multiplied three or four-fold,” says Brian McAuliffe, president of CBRE Capital Markets and leader of the firm’s multifamily sales business, working in the firms Chicago office.

Regional malls, class-B and class-C shopping centers in deep trouble

The pandemic has put tremendous pressure on many shopping malls. Hundreds have lost many of their largest, most important retail tenants as department store chains like J.C. Penney and Lord & Taylor declared bankruptcy and others scale back in the chaos caused by the coronavirus.

The vast majority of class-B and class-C malls have lost at least one anchor tenant, according to research from Green Street Advisors. That adds up to several hundred properties that have lost a significant part of their income.

Trepp has identified more than 100 properties that owners may soon surrender to lenders, more than a quarter of those are regional malls.

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    Growing Number of Landlords Are Offering Restaurants Percentage-Only Rent

    That might still not be enough to save many smaller operators.

    A recent survey by the NYC Hospitality Alliance helps illustrate the dire straits of America’s restaurants.

    The survey found that 87 percent of New York City’s restaurants, bars and nightlife venues couldn’t pay their full rent in August. The culprit, of course, is pandemic restrictions imposed on these businesses.

    Further complicating the situation, 60 percent of the businesses surveyed said their landlords hadn’t waived any of their rent in response to the coronavirus pandemic. But in New York City and across the country, a number of landlords are offering concessions for restaurants and other hospitality businesses in the form of percentage-only rent.

    Some restaurant landlords are temporarily switching from fixed-rate rents to rents based only on a share of the tenant’s gross sales or revenue, in an effort to help these businesses survive, says Ken Lamy, founder, president and CEO of The Lamy Group, a Mandeville, La.-based financial management consulting firm. Landlords are then leaving the door open to revisiting the rent structure at a later date, perhaps 12 to 18 months down the road, he notes.

    “Rent is a function of revenue, and with restaurant revenue getting decimated in certain types of trade areas, one way to protect the financial stability of a restaurant—and provide a cushion before we recover from COVID-19—is to structure a percentage-only rent deal and fix the restaurant’s rental expense with an acceptable percentage of gross sales,” says Jason Kastner, managing director of the national advisory group at Washington, D.C.-based Dochter & Alexander Retail Advisors, which represents restaurant and retail tenants.

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      Turning a dead mall into a warehouse will slash its value as much as 90%, Barclays predicts

      Turning dead malls into fulfillment centers, apartment complexes, schools or medical offices could mean massive writeoffs in property values, according to a new Barclays report.

      In the coming years, hundreds of America’s roughly 1,100 malls are expected to shut, as retail, restaurant and movie theater closures pile up, and more people favor shopping on the internet over heading to the store.

      Property owners are going to be tasked with giving dead malls a new life. But the future prospects — fulfillment centers, apartment complexes, schools or medical offices — could mean massive writeoffs in property values, according to a new Barclays report.

      Turning a shuttered mall into an e-commerce warehouse or a residential complex could reduce the value of the property anywhere from 60% to 90%, Ryan Preclaw, a research analyst at Barclays, told CNBC’s “Worldwide Exchange” Thursday morning.

      While the land that malls sit on may offer better recovery values if it is used for a mixed-use development, he said, historically that has only happened for about 15% of former malls.

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        Retailers have started paying rent again but are still fighting with their landlords

        Less than a third of retail companies paid at least 75% of June rent, according to a study by the National Retail Federation and the investment bank PJ Solomon.

        Month by month, retailers are starting to pay more rent as states lift shutdown orders and consumers become more comfortable venturing out to shop during the coronavirus pandemic. But negotiations, sometimes heated, continue between tenants and landlords.

        In some cities and popular shopping districts, commercial rents are still sky high. Tensions keep brewing, as mall and shopping center owners grapple with retailers looking to close stores permanently, downsize or try to rewrite contracts in their favor. And the pressures are likely to roll into 2021, with the start of the year typically drawing a fresh wave of retail store closures as companies reevaluate their brick-and-mortar footprints after the holidays.

        Less than a third of companies paid at least 75% of June rent, according to a study released Thursday by the National Retail Federation and the investment bank PJ Solomon. By July, the number of rent payers had almost doubled to 65%, it said. The study polled 48 C-level executives at retailers with at least 10 stores and more than $100 million in sales in 2019, from July 15 to July 28.

        The survey also found that 73% of retailers that missed payments are planning to pay back at least half of the rent owed since a nationwide shutdown began in March. More than half of respondents said they were able to get some sort of rent relief from their landlords, with deferrals into late 2020 or 2021 being the most likely concession.

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          Mall owners Simon, Brookfield set to rescue JC Penney from bankruptcy in $800 million deal

          U.S. mall owners Simon and Brookfield are close to finalizing an $800 million deal to rescue J.C. Penney from bankruptcy.

          U.S. mall owners Simon Property Group and Brookfield Property Partners are close to finalizing an $800 million deal to rescue the embattled department store chain J.C. Penney from bankruptcy, avoiding a total liquidation and saving about 70,000 jobs and 650 stores, Joshua Sussberg of the law firm Kirkland & Ellis said Wednesday.

          Simon and Brookfield will pay roughly $300 million in cash and assume $500 million in debt, Sussberg said during a court hearing.

          Wells Fargo has also agreed to give Penney $2 billion in revolving credit once the transaction is completed, leaving the retailer with $1 billion in cash, he said. Penney plans to seek approval from the bankruptcy judge for this rescue deal early next month.

          Meantime, the hedge funds and private equity firms that have financed Penney’s bankruptcy are set to take ownership of some stores and the retailer’s distribution centers, in exchange for forgiving some of Penney’s $5 billion debt load. Penney’s lenders, led by H/2 Capital Partners, are going to own those assets in two different real estate investment trusts, or REITs, Sussberg said.

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            9 retailers that are avoiding the industry’s shakeout and opening stores

            The coronavirus pandemic has upended the retail industry and pushed dozens of companies into bankruptcy.

            But there are still pockets of growth, with a number of retailers looking to open additional stores.

            Altogether, as of Friday, retailers have announced 7,707 store closures and 3,344 store openings so far this year, according to a tracking by Coresight Research.

            While much of the turmoil in the industry has stemmed from apparel chains and department store operators, the expansion finds itself in a number of other categories: beauty, home goods, discount and grocery chains.

            Here are 9 retailers opening more stores in 2020 and beyond.

            At Home

            Market capitalization: $966 million
            Stock performance year-to-date: +173%

            At Home Chief Executive Lee Bird said earlier this summer the company could grow from the 219 locations it has today to more than 600 shops nationwide, building on the momentum it has seen at its stores and online during the coronavirus pandemic. While shoppers have curtailed spending on apparel and other accessories, more are shopping for furniture and other items to spruce up their homes. Companies like Wayfair and Pottery Barn have benefited from the trend as well.

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              Grocery stores might be the next big thing to move into malls

              The biggest mall owner in the U.S., Simon Property Group, hints at opening more grocery stores in its malls.

              As consumer shopping habits change, America’s shopping malls have anointed many saviors: food halls, movie theaters, gyms. Grocery stores could be next on the list.

              Simon Property Group, the largest mall owner in the U.S., hinted at the idea on an earnings call Monday evening. The comments came on the heels of a report that said Amazon was in talks with Simon to open warehouses at some of its shuttered Sears and J.C. Penney locations. CEO David Simon did not comment on the report Monday. Amazon also previously declined to comment.

              One analyst thinks that instead of opening logistics hubs at Simon malls, Amazon might be looking to open more of its own grocery stores there — which could end up working out better for both parties.

              “We understand that Amazon is reportedly looking for grocery deals in the Boston market, and grocery offerings at A-rated malls, similar to Europe and Asia, would provide essential retail use and boost shopper traffic, in our opinion,” Compass Point real estate analyst Floris van Dijkum said in a note to clients. It is much more common overseas than in the U.S. for malls to have grocery stores as anchors, he said.

              One huge hurdle with opening an industrial space, such as an Amazon logistics hub, within a shopping mall is that rezoning that would be required.

              But, van Dijkum said, a grocery store is considered a retail use and so it could be a “much easier” fill for an old department store. A grocery store in a mall could also draw more customers in and benefit the surrounding retailers and restaurants more than a warehouse, he said.

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                Mall Landlords, Authentic Brands in Talks to Buy J.C. Penney

                Simon Property Group and Brookfield Property Partners are looking at buying another struggling retailer.

                (Bloomberg)—The two largest mall landlords and Authentic Brands Group LLC are in talks to buy bankrupt department-store chain J.C. Penney Co., according to people familiar with the matter.

                Authentic Brands may team up with Simon Property Group Inc. and Brookfield Property Partners LP to acquire the retailer as part of its court reorganization, said the people, who asked not to be identified because the talks are private. The discussions are still fluid and may ultimately end without a deal.

                J.C. Penney, which filed for Chapter 11 protection in May, has been racing to firm up a business plan by a July 14 deadline, after which the company risks running out of cash to finance its reorganization and emerge from bankruptcy court.

                For the landlords, buying J.C. Penney would ensure the survival of one of their most ubiquitous tenants amid a wave of retail distress that has seen thousands of stores close permanently. That’s in addition to the pandemic lockdown that shuttered most retailers for months nationwide.

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                  25,000 stores are predicted to close in 2020, as the coronavirus pandemic accelerates industry upheaval

                  U.S. retailers could announce between 20,000 and 25,000 closures this year, according to a tracking by Coresight Research, with 55% to 60% of those situated in America’s malls.

                  One result of the coronavirus pandemic could be as many as 25,000 store closures announced by retailers this year, as the crisis takes a toll on many businesses, and already has pushed some over the brink and into bankruptcy.

                  U.S. retailers could announce between 20,000 and 25,000 closures in 2020, according to a tracking by Coresight Research, with 55% to 60% of those situated in America’s malls. That would also mark a record — which was previously the more than 9,300 locations in 2019.

                  Coresight was earlier this year forecasting there could be more than 15,000 store closures announced by retailers in 2020.

                  A glut of vacant storefronts will leave landlords scrambling to fill those spaces or find new uses for their real estate. There are not many retailers still growing via bricks and mortar today. And if they are, many are looking to downsize to smaller shops.

                  In recent weeks, bankruptcy filings in retail have begun to mount. Coresight said it expects more liquidations, ticking up the closure tally. Department store chains Neiman Marcus, Stage Stores and J.C. Penney have filed for bankruptcy protection. So have the home goods chain Tuesday Morning and the apparel maker J.Crew. A number of these retailers will close some stores and begin operating again, but Stage Stores has warned it may need to shutter all of its locations if it doesn’t find a buyer.

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                    The Mall of America hasn’t paid its mortgage in two months

                    The biggest shopping center in the country, The Mall of America, has missed two months of payments on its $1.4 billion mortgage.

                    Retailers aren’t the only ones struggling to pay the bills.

                    The biggest shopping center in the country, The Mall of America, has missed two months of payments on its $1.4 billion mortgage, a sign of just how much retail real estate owners are reeling during the coronavirus pandemic.

                    The mall, operated by private developers Triple Five Group, skipped mortgage payments in April and May, according to Trepp, a New York-based research firm that tracks the commercial mortgage-backed securities, or CMBS, market.

                    A spokesperson for Triple Five Group did not immediately respond to CNBC’s request for comment.

                    Mall of America closed its doors because of the Covid-19 crisis on March 17. It has now notified notified Wells Fargo, the master servicer that is overseeing its mortgage, of the “hardships” it faces. But it is not clear if Triple Five Group will seek forbearance on its loan.

                    Mall of America, located in Bloomington, Minnesota, is planning to reopen its retail stores on June 1, according to its website.

                    “Next to hotel owners, retailers have been the hardest hit by the Covid-19 crisis,” Manus Clancy, Trepp senior managing director, told CNBC. “The percentage of delinquent retail loans has already surpassed the highest percentage reached during the financial crisis and could be headed higher.”

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