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Analysis: increased foot traffic, new leases may not be enough to rescue mall valuations

Shopping malls’ continued fall has made them less appealing for commercial real estate owners and investors alike, GlobeSt.com reports. Even new leases and more foot traffic does not appear to be enough to rescue dying malls.

Shopping centers like The Mall at Stonecrest enjoyed a victory—successfully leasing two of its anchor spaces this year—only for it to be overshadowed by a venture capital firm that was in talks to purchase the mall backing out of the agreement in July, according Morningstar’s report, “An Update on Malls The good, the bad, and the ugly for regional shopping centers.”

“The property was appraised for $67 million in July 2018, down from $144.5 million at issuance, and we believe the ultimate sale price may be even lower,” the report said.

Malls remain the “problem child” of retail, according to the Morningstar report. They’re still doing worse than the average retail property; 15.2% of the CMBS (commercial mortgage-backed-securities) malls are delinquent or REO (real estate owned), compared to 10.5% across all retail loans. Additionally, almost a quarter (23.6%) of malls are specially serviced, versus 12.2% of all retail properties.

Falling occupancy numbers have also hurt malls’ standing. Average occupancy across CMBS malls dropped 270 basis points from its previous reporting period. While some properties’ most recent financials go back to the height of the COVID-19 pandemic, the trend is still negative.

“All mall appraisals since May 2021 valued the properties lower than previous appraisals,” the report said. “The value declines during the same period Simon posted strong earnings highlights the dichotomy between Class A malls owned by well-capitalized sponsors, and the older malls that have been weakening for years.”

On the bright side…

Morningstar’s report does have “the good” in its title, and there are some signs for optimism for malls. Retail bankruptcies are down so far this year and the delinquency rate is declining. Additionally, mall foot traffic has gone up and mall REITs (real estate investment trusts) are exceeding performance expectations. Simon’s funds from operations were $1.22 billion during the second quarter of this year—a 15% increase from the same time period in 2019, according to the mall owner’s earnings call.

These figures might not rescue mall valuations, but they could symbolize the potential for improvement.

“The outlook for some retailers is improving,” the report said. “According to Macerich’s second-quarter 2021 earnings call, tenant sales in June 2021 were up 15% from June 2019. JCPenney, which exited bankruptcy in early 2021 after being purchased by Simon Property Group and Brookfield Asset Management, is slated to launch new brands and a beauty initiative later this year, according to Simon’s CEO.”

Click here for Morningstar’s full analysis.

Joe Dyton can be reached at joed@fifthgenmedia.com.

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