Centennial and Pacific Retail Capital Partners are spending big on plans to bring left-for-dead malls back to life
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All signs point away from investing in shopping malls, which have been branded as dead or dying.
At Fox Valley Mall in the Chicago suburb of Aurora, for example, two department stores are vacant. An hour’s drive away, in Vernon Hills, Illinois, the Hawthorn Mall also suffers from two department store vacancies.
But real estate firm Centennial is betting big that malls being left for dead can have a second life, turning them into 24/7 communities that include housing and live events. It’s dropping hundreds of millions of dollars on the two properties in the Chicago suburbs alone.
“We really believe that if you're not investing in your malls, your mall will continue to go backwards,” said Centennial Chief Investment Officer Carl Tash.
The mall industry has been dominated by traditional operators that are increasingly abandoning certain properties, and by players that buy malls cheaply, milk them of any profitability and then sell the land.
Centennial and the Los Angeles developer Pacific Retail Capital Partners (PRCP) are creating a new type of mall investor by heavily deploying capital to turn the average mall into "micro-city" hubs for living, working and entertaining — in addition to shopping.
As they pave the way, other investors tell The Messenger privately that they are quietly watching from the sidelines.
The key to Centennial and PRCP’s strategies is mixed-use redevelopment. The projects often include demolishing parts of the malls that are no longer usable, adding residential components and moving existing parking. Under the redevelopment, the mall resembles more of a micro-city within the suburbs than the former enclosed shopping center.
Centennial plans to embark on two to three major projects a year, Tash said. For example, at Hawthorn Mall, it plans to build 808 multifamily residences and a 162 unit senior living community; trim under-performing retail space from 1.4 million square feet to 635,000 square feet; and add a 25,000-square-foot grocery store and 109,000 square feet of open-air retail.
Those renovations come with a price tag of $250 million.
“The strategy that we're applying is really making these into 24/7 properties, versus I would say, three days a week, 12-hour properties,” Tash said.
PRCP recently received approval for a $200 million residential project to replace a Carson’s department store, which has been vacant since 2018, at Yorktown Center mall in Lombard, Illinois.
The largest issue for these boutique players is finding the capital.
The delinquency rate for regional malls was 7.54% in June, significantly higher than all other real estate asset types, according to credit rating agency Fitch. The majority of malls have struggled in recent years due to falling foot traffic, increasing vacancies and department store bankruptcies.
As a result, traditional lenders are hesitant. Centennial is instead turning to alternative ways of financing their projects like family offices and distressed debt funds, Tash said.
PRCP Chief Financial Officer Oscar Parra added that diversification of the property can help.
“You're starting to push into the $500 million range [with these projects]. That's tough capital we're trying to attract,” Parra said. “Raising additional capital on the retail side becomes a lot easier when you have the multi-capital asset property.”
Not only is the investment pricey, it’s also difficult on paper. It requires buy-in from local municipalities to determine what components need to be added to the property and potential zoning adjustments.
It’s a big shift for local communities, where thriving malls have been both a cultural hub and financial benefit. Retail trade group ICSC estimated in 2018 that malls and shopping centers contribute more than $400 billion in local tax revenue annually, with each dormant mall resulting in tens of millions of dollars of lost tax revenue and economic activity.
It helps that there are few players in the mall redevelopment space. Centennial and PRCP say they don’t compete with firms buying properties that have been foreclosed upon. Instead, they are scooping up malls in prime suburban locations that aren’t getting the love, attention and money needed from the mall titans who are now consolidating their portfolio to core assets.
Unibail-Rodamco-Westfield, for example, is currently selling off parts of its portfolio as just five of its malls account for half of its U.S. portfolio’s value, with a combined worth of $5 billion. The mall giant recently sold the Westfield Valencia Town Center in Santa Clarita, California, to Centennial for $199 million.
Legacy Mall Investors Step Back
Those that made their name in the mall game are taking a step back, allowing space for new investors to tap in.
“I'd be very surprised if Simon or Macerich made any new acquisitions,” PRCP CEO Steve Plenge said.
“There are more private owners than there have ever been and we think that trend is probably going to continue,” Parra added. “These major REITs continue to prune their portfolio.That's probably going to continue for another five years plus, which means even more malls in private hands.”
The properties trading hands and experiencing increased investment, even with some of that retail space being demolished, helps keep retail tenants in place, brokerage Urbanlime Real Estate Executive Vice President Lanné Bennett said.
“I look at the strength of the developer before I start talking to them about my clients, because I want to make sure that they're going to have the ability to execute with the vision that they have,” said Bennett, who previously worked for mall developers Unibail-Rodamco-Westfield and Starwood Retail Partners.
Malls are “going to lose their value and they’ll be bought for pennies on the dollar. But then whoever buys them, hopefully, will come in and be community-minded and do something that's relevant today, and for the next 30 years.”
