How Mall Redevelopments Could Tank Property Values

Even before the COVID-19 pandemic, many malls around the country were in trouble. The obvious solution for real estate investors and developers has been to turn these decaying centers into other property types. 

The case for these conversions is straightforward: In the US, there is an oversupply of retail buildings, and many defunct malls have already been converted to industrial uses. 

Since 2017, a total of 13.8 million square feet of retail space has been converted to 15.5 million square feet of industrial space across the country, according to CBRE, which expects the trend to continue

“As online retail evolves and expands, many retailers and developers will find opportunities to convert underperforming stores into final-mile distribution sites to support e-commerce operations,” John Morris, Americas Industrial and Logistics and Retail Leader for CBRE said in prepared remarks. 

The Downside 

Yet there is a significant downside to this strategy.

In a report titled, “The Long-Awaited Reckoning for Retail,” Barclays Capital says that 15% to 17% of US malls may no longer be “viable as shopping centers,” per CNBC. About 10,000 retail stores could close in 2020, according to Barclays. Once 20% of a mall is vacant, it is at risk of falling into default.

Here’s the rub: Converting these malls to fulfillment centers, apartment complexes, schools or medical offices could reduce their property values anywhere from 60% to 90%, Ryan Preclaw, a research analyst at Barclays, told CNBC’s “Worldwide Exchange.”

If the mall’s land is turned into a mixed-use development, that may offer better recovery values. But that has only happened for about 15% of former malls, Preclaw told CNBC.

Indeed, in an earlier interview with GlobeSt, Jake Reiter, president of Verde Capital, pointed out the difficulty of redeveloping malls

“If you have enough patience and enough capital, you could redevelop a mall,” Reiter told GlobeSt. “But that’s an art form unto itself. That’s serious money with really smart people that know retail, multifamily, medical office and rezoning.”

For those that have the expertise and patience, the mall conversions could ultimately make sense. It just won’t happen overnight. “I know people that have successfully redeveloped malls, and it has taken them in, good times, ten years,” Reiter says. “It was just an enormously time-consuming and expensive experience. And it took an enormous amount of expertise to do that.”

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