What’s next for B and C malls

What are the biggest challenges landlords of B and C malls properties face?

Not only are these malls having difficulty with the anchors, but they are having difficulty with the non-anchors. At the end of the day, there aren’t that many supermarkets or dollar stores that can fill all of these locations. There are about 350 Class B malls and 350 Class C malls. To make matters worse, the appraised value of these malls could be diminished by up to 50 percent, so there is going to be a tremendous challenge to access capital to reinvest in the facility, especially when there is absolute uncertainty when it comes to asset values. Right now, it is very difficult to pinpoint the value with COVID and supply chain issues and inflation and labor. Therefore, it is going to be much, much more challenging to go to [the] bank and borrow money.

I imagine it’s difficult to access capital unless it’s rescue capital?

That is true, but think of how expensive that capital is and the restrictions that you’re going to have on it. Frankly, even those more aggressive, opportunistic lenders are hesitant right now unless it is a really good deal and the value that they are putting on these B and C malls is so decreased that they are clearly in the money.

What resolutions are you starting to see?

We saw loan restructuring and forbearance agreements during the pandemic, as well as bankruptcy filings. What we’re also seeing is that owners are unloading malls at large discounts, which cements the idea that these large owners do not have confidence that the malls will recover post pandemic. Mall owners are sometimes handing the keys to the lenders because there is literally no equity. For owners that aren’t doing that, lenders are sharpening their pencils and are not so quick to give forbearance agreements or look the other way when it comes to tripping up on covenants.

Will most of these properties end up going to opportunistic buyers, or could a fair number go to lenders as REO?

We’re going to see both. In many cases, a buyer can come in and acquire a property at a very low value, which allows them to more easily operate the mall properly. The only way to justify putting good money after bad is to reinvent the space, so that’s going to be another trend and we’re already seeing that with the addition of residential space or conversion to third-party warehouse space for companies like Amazon. But if you do this, what do the new economics look like? When you factor in the cost of capital with the old money and the new money, are the expected returns justified? Right now, I’m not sure they are. Other alternatives for Class B and C malls include medical offices or activity-based businesses like rock climbing. I think it is too early to tell if those activity-based investments are going to bring the traffic. There is going to be that type of reinvention of the B and C mall, and where it shakes out is difficult to determine right now.

Do you have any advice for B and C mall owners on how to figure out next steps for their assets?

You have to look first at the underlying financials. Do they have an anchor? What are the rent rolls? Then, it really is understanding that mall’s place in their market. Some of these B and C malls are critical to a neighborhood that may be going through a tough time and they are trying to get things back. You can really have a grassroots type of initiative where you work with local government, and that can be the starting point when it comes to reinvesting in the facility. There also might be some local banks that would be interested in doing something that benefits the community. You could use that local interest as a springboard to reinvent the place at probably the best cost. You also have to look at the property from the perspective of: Do we have a strategic advantage in this location that is not necessarily retail? You really have to do a self-evaluation that might be painful to some of these owners that have owned these properties for an extended period of time.

Opportunistic buyers have been circling the hotel sector. What about retail?

There is absolutely interest from private equity, investment funds, banks and high-net-worth individuals, but it seems to be going slowly. It is easier to put a value on hotels, whereas retail has so many other factors that are impacting it. There are so many that are circling, but there are not many that are pulling the trigger because of lack of clarity on the value.

We have been talking about the demise of B and C malls for years. What is ahead in the near term?

If the true impact of COVID is in the rearview mirror, that’s going to lead to more clarity as it relates to value. Then, I believe, there will be a tremendous amount of deals that happen in the next 12 months. You will have a lot of large owners unloading properties at values that are way below what they had on their books. You’re going to have banks doing the same. If COVID is still lingering to a point where it is consuming society, then that uncertainty will lead to uncertainty around values, and you won’t see many deals.