Mall owners will pay to reinvent properties

The owner of Newgate Mall plans to pour $500,000 into overhauling the outdated food court in a bid to lure restaurateurs and hungry shoppers.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.