It’s no secret the American shopping mall is an endangered species. While the nostalgia of the shopping mall might lead some to mourn its loss, savvy commercial real estate investors should keep in mind that it’s a massive redevelopment opportunity in the making.
“As shopping malls experience record vacancies and declining values, it’s inevitable that these massive properties will continue to close across the United States,” said Kevin Wolfer, CEO of Kennedy Funding. “To the right eye, these sprawling shopping centers represent a huge redevelopment opportunity that could generate value for years to come.”
As mall after mall prepares to shut its doors for the final time, owners will be looking to make a quick sale. Others will be looking to add value to their property to attract new shoppers and stay afloat any way they can. Either way, redevelopers with bright ideas are already circling in the waters for a piece of the pie.
Shopping mall closures are imminent
It might seem odd that shopping malls and department stores, which largely replaced mom and pop shops from the 1950s onward, are now amid a death knell themselves. However, recent closures and bankruptcies of big retail stores like Toys ‘R’ Us and Claire’s do not bode well for malls, the mother of brick-and-mortar retail establishments.
Credit Suisse estimates that up to 25 percent of the remaining 1,100 malls in the U.S. will close within the next five years. In the second quarter of 2018, vacancy rates hit a six year high of 8.6 percent, signaling that rumors of the shopping mall’s demise have not been greatly exaggerated.
For prospective redevelopers, the decline of the mall represents a huge opportunity. Since mid-2017, shopping malls have declined in value by an average of 14 percent.
What redevelopment opportunities do shopping malls present?
While the mass swath of closures predicted by Credit Suisse is only just beginning, mall redevelopment has already begun. Redevelopers are leveraging mall property for a wide array of uses, including residential, offices, and transportation infrastructure.
In Seattle, for example, the Northgate Mall property is being redeveloped to host several valuable assets. Some of the parking lot is being reconfigured into a light rail station that connects to downtown Seattle, while other parts are being turned into LEED-certified residential apartments. Plans also include senior housing, a medical center, new retail locations, and even a bioswale to protect local waterways from polluted runoff. The Northgate Mall will still exist, but in a dramatically different fashion that leverages the value potential redevelopment has.
For redevelopers, the Northgate model represents a hybrid option: consumers need not be buyers to reap the benefits of redevelopment projects. Some malls are reinventing themselves in a bid to survive, and with that comes the chance to capitalize on new projects. Other mall owners are preparing their exit strategy, however, and full-scale conversions into office space, mixed-use housing, or other sprawling redevelopments that are rising in value remains a potentially lucrative opportunity as well.
Using a direct private lender for acquisitions and redevelopment
Even as shopping malls decline in value, the acquisition of these properties still represents a significant capital investment. A recent transaction in September 2017 for the Logan Valley Mall in Altoona, Pennsylvania, cost the buyer $33.2 million, and while the sticker price would certainly be lower today, it could still require a direct private lender’s help.
Obtaining financing for endangered assets like malls can be difficult if you’re dealing with conventional lenders. Banks are highly risk-averse and likely to balk at the notion of financing a mall purchase, and even with a detailed plan for redevelopment conventional lenders are likely to see a lot of obstacles and risks. Direct private lenders, on the other hand, can take the entire redevelopment plan into account. Plus, their ability to close loans quickly gets investors the capital necessary to acquire the target property and begin redevelopment.
Kennedy Funding specializes in commercial real estate loans and bridge loans that can help borrowers quickly acquire and redevelop properties that conventional lenders won’t consider. If you’re looking to capitalize on the end of the shopping mall era, look no further than Kennedy.