So I have this little habit of reading a little news on MSNBC.com during breakfast and, sometimes, lunch. Today something caught my eye entitled “Fallout begins after dismal holiday season”. One paragraph in particular:
About 160,000 stores will have closed this year and 200,000 more could shutter next year, said Burt P. Flickinger III, managing director of consulting firm Strategic Resource Group. That would be the industry’s biggest contraction in 35 years. In March and April of next year, Flickinger expects 2,000 to 3,000 malls to shutter.
When I first read this, I had to reread the numbers. That’s right – 2,000 to 3,000 malls may close! And that’s just in March in April! I’d expect the rest of 2009 to be painful too. Having blogged about how to read trouble in mall financial statements, defining a regional mall decline scale, profitability challenges of older regional malls, functional challenges of older regional malls, hidden vacancies in regional malls, and temporary tenants, it looks like I’ll get to quote myself in future mall appraisals!
What I didn’t have a chance to do in those articles was take a macro view of the situation. Of course, what I’m discussing doesn’t apply much or at all to the competitive Class A regional malls (you know, the ones you like to go).
- Whereas it was hard to get new anchors, it will be downright impossible now. I’m not even sure if percentage rent only and little or no common area maintenance contribution will be enough! The cost to redo the interior, stock and incur payroll costs to start a new store are too daunting for most major retailers in today’s soft retail market even given such a steal of a deal.
- For those national tenants that might be willing to open a new store in a mall, it becomes a case of “how low can you go, Joe?” For the very competitive and newer malls this won’t apply, but for those caught at the bottom or middle third or so, this will be the mantra.
- Expect to see more temporary tenants. For bottom and middle tier malls, you’ll probably be surprised by the range you’ll see in 2009. There will be more stores that just don’t fit in with the schema of the mall.
- The decline scale will accelerate. Upgrades have already been put off; now expect maintenance to be cut to the bare bones. Hopefully, the parking lot potholes will be fixed. Hopefully.
- Testing for land value becomes more important than ever. Many of these “2,000 to 3,000″ regional malls that will be forced to “close” will need to be redeveloped. Having appraised these types of situations in different parts of the country, I can say that the highest and best use analysis should not be a single page in a 50 to 150 page report.
- There may be few or no takers for a failed mall. It may be necessary to temporary tenant it out and/or add low tier large space users like flea markets just to pay the bills until such time as a redevelopment buyer comes along. Of course the redevelopment buyer is either a developer with bank financing (yes, we’re talking a long time in the future because banks aren’t lending on this sort of deal) or the cash-only, buy-it-at-a-bargain investor.
Let’s unwrap the crystal ball I got for Christmas (I got a dart board last year – we appraisers always need a bigger and better one). The need for accurate and realistic market values for failed regional malls is greater than ever. Projections need support. Forget the “3 percent annually” income and expense projections. You’ll need quite a premium over Korpacz’s investor study numbers. Cap rates really need to be market derived, not a mathematical band of investment or mortgage equity. Listings will tell you a very big story… at the very least, you’ll be able to get asking cap rates which would likely have a huge premium over your mathematical cap rates. Many tenants will need to have lower income projections because they will renegotiate. The cost approach will be meaningless and the sales comparison approach almost useless (there just won’t be enough non-distressed sales). The percentage of owner-financed deals will increase greatly.
As for tax appeals, expect the volume to go through the roof. It’s going to be a good year for real estate attorneys and tax appeal consultants. Beware the administrative snafu – strong arguments to get a case dismissed because some information was not submitted to the assessor before a certain date or some bit of data was not made available to them prior to filing the appeal. Expect some major battles, though, because assessors will not be rolling over on large ticket items like a regional mall. Most individual assessors will only have to deal with one or a few, although the flip side is that the number of appeals of all property types on their plate will be enough to give them indigestion, so maybe it’ll be just the opposite. It’s up to each individual assessor.
Hmm… I seem to have clouded over my crystal ball. Maybe I just overworked it and it needed a rest.
John Simpson, MAI
