Mall own­ers will pay to rein­vent prop­er­ties

Northwest Arkansas Democrat-Gazette - - WEATHER REPORT - SARAH MUL­HOL­LAND In­for­ma­tion for this ar­ti­cle was con­trib­uted by Lau­ren Cole­man-Lochner of Bloomberg News.

The owner of New­gate Mall plans to pour $500,000 into over­haul­ing the out­dated food court in a bid to lure restau­ra­teurs and hun­gry shop­pers. Rent pay­ments from eater­ies are never go­ing to re­coup the ren­o­va­tion costs, but for land­lord Time Equities Inc., that’s not the point. The point is sur­vival.

The work is part of an ef­fort to breathe new life into the en­tire 718,000-square-foot cen­ter and in­crease foot traf­fic, ac­cord­ing to Ami Ziff, di­rec­tor of na­tional re­tail at New York­based Time Equities. The com­pany, which bought New­gate in Og­den, Utah, from GGP Inc. for $69.5 mil­lion last year, is one of many land­lords wa­ger­ing that elab­o­rate makeovers will keep them com­pet­i­tive as they rein­vent their prop­er­ties in the age of Ama­zon.

Costs are es­ca­lat­ing as mall own­ers work to keep their real es­tate up to date and fill the void left by fail­ing stores. The com­pa­nies are turn­ing to ev­ery­thing from restau­rants and bars to mini-golf cour­ses and rock-climb­ing gyms to draw in cus­tomers who ap­pear more in­ter­ested in be­ing en­ter­tained dur­ing a trip to the mall than they are in buy­ing clothes and elec­tron­ics. The new ten­ants will pay higher rents than strug­gling chains such as Macy’s and Sears, in the hope they will at­tract more traf­fic for re­tail­ers at the prop­erty, ac­cord­ing to Haen­del St. Juste, an an­a­lyst at Mizuho Se­cu­ri­ties USA LLC.

“The math is pretty ob­vi­ous, pretty com­pelling, but there are risks,” St. Juste said in an in­ter­view. “This hasn’t been done be­fore on a broad scale.”

It’s more costly to build and main­tain large, cus­tom­ized spa­ces that re­quire ex­ten­sive up­dates such as com­mer­cial kitchens, ac­cord­ing to St. Juste. Land­lords’ cap­i­tal ex­pen­di­tures — in­clud­ing re­pairs, re­mod­el­ing and leas­ing costs — are ris­ing rel­a­tive to the in­come be­ing gen­er­ated by re­tail prop­er­ties.

As the re­tail busi­ness evolves, such cap­i­tal ex­pen­di­tures will be­come more cru­cial in assess­ing prop­erty val­ues, ac­cord­ing to Green Street Ad­vi­sors LLC, a real es­tate re­search firm. Many in­vestors aren’t ad­e­quately ac­count­ing for the ris­ing costs of main­tain­ing a mall, Green Street said in its an­nual out­look in Jan­uary. The real ques­tion is whether this is a tem­po­rary blip, or a new nor­mal, ac­cord­ing to Cedrik Lechance, an an­a­lyst at the New­port Beach, Calif.-based firm.

More than a dozen re­tail­ers have gone bank­rupt this year as the shift to­ward on­line shop­ping ac­cel­er­ates. Even healthy com­pa­nies are shut­ter­ing hun­dreds of lo­ca­tions. As many as 13,000 stores are fore­cast to close next year, com­pared with 4,000 in 2016, ac­cord­ing to bro­ker­age Cushman & Wake­field Inc.

Many land­lords have been proac­tive in re­claim­ing space from weaker ten­ants to fill with more prof­itable ones. Chicagob­ased GGP, the No. 2 U.S. mall owner, has bought back 115 depart­ment stores over the past six years and re­de­vel­oped them, Chief Ex­ec­u­tive Of­fi­cer San­deep Mathrani said last month dur­ing the Na­tional As­so­ci­a­tion of Real Es­tate In­vest­ment Trust’s an­nual con­fer­ence in New York. The new ten­ant ros­ter at those malls in­cludes Best Buy and Nord­strom stores, restau­rant-ar­cade chain Dave & Buster’s and health club Life Time Fit­ness, he said.

“We’ve ac­tu­ally made a very, very big state­ment by say­ing that over the next five years, we hope to re­cap­ture an­other 100 depart­ment stores,” Mathrani said.

Depart­ment stores, the heart of subur­ban malls for decades, have been par­tic­u­larly hard hit by chang­ing con­sumer tastes, leav­ing gap­ing holes in their wake. The de­par­ture of a cen­ter’s anchor ten­ant can eas­ily spur an over­haul of the en­tire prop­erty.

“If Sears shuts down, you need to rein­vent that part of the mall,” said Green Street’s Lechance. “Typ­i­cally, when you rein­vent one part of the mall, you re­de­velop the whole mall.

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