In the past seven-years there has been a sharp increase in mall vacancies and particularly big box stores. Their demise can be attributed to successful e-commerce platforms that are taking the market share. These enormous tracts of land with large parking lots, high vacancies, and desirable locations are of unique interest to certain private equity real estate firms, while others firms are steering clear.
In recent months, hedge funds have focused on short selling malls while others, such as Blackstone have not been active in US mall space since the decline in 2011. Nadeem Meghji, the firm’s head of Americas real estate claims, “[i]t’s hard to invest in a space where there are continued macro headwinds and secular headwinds,” also noting the challenges of scalability in a market “sector that is so heavily exposed.”
“The ideal opportunity for investors comes at a low enough price to justify capital expenditures involved to reposition the property and backfill vacancies,” states Keith Knutsson of Integrale Advisors. Investors would seek out experiential fitness, food and beverage tenants. Finding the appropriate tenants for the uncommon space presents a challenge investors must get right.
In the meantime, Madison International Realty believes the odds are in their favor through stock purchases in A-mall REITs, shopping centers greater than $400 per square foot. Madison’s president and founder, Ronald Dickerman, argues “there is asymmetrical pricing between public and private markets,” in which opportunity can be found. General Growth Properties (GGP), the investment trust that focuses on owning and operating malls, “is trading at a 25 percent discount.” The private market values GGP’s malls a full 200 basis points below their trading value, which is a significant difference between a 6 cap and those 4 cap malls.
However, not all investors believe US mall REITs offer as great of discounts. Meghji disagrees with the basis for the realized discounts and questions research analysts’ private market valuations of mall properties due to the absence of recent mall property sales. Only time will tell what the fate of mall properties are, but there is no denying the prolific use of e-commerce sites that come with ease and accessibility.