Apartment Investors Mull Opportunities in Distressed Malls

Article originally posted on National Real Estate Investor on November 16, 2020

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Apartment dealmakers may find an opportunity to build new apartments around the shells of under-performing or empty regional malls. Hundreds of troubled shopping malls may be seized by lenders over the next year, experts say.

“In the current market with the pandemic, the number of properties considering this kind of redevelopment has multiplied three or four-fold,” says Brian McAuliffe, president of CBRE Capital Markets and leader of the firm’s multifamily sales business, working in the firms Chicago office.

Regional malls, class-B and class-C shopping centers in deep trouble

The pandemic has put tremendous pressure on many shopping malls. Hundreds have lost many of their largest, most important retail tenants as department store chains like J.C. Penney and Lord & Taylor declared bankruptcy and others scale back in the chaos caused by the coronavirus.

The vast majority of class-B and class-C malls have lost at least one anchor tenant, according to research from Green Street Advisors. That adds up to several hundred properties that have lost a significant part of their income.

Trepp has identified more than 100 properties that owners may soon surrender to lenders, more than a quarter of those are regional malls.

“Malls are starting to go back to lenders—it definitely is happening now,” says Thomas Dobrowski, vice chairman for Newmark Group, leading a capital markets group specializing in enclosed regional malls, working in the firm’s New York City office.

More lenders are likely to take action in January and February, after the holiday season is complete. “Most lenders have been willing to work with the borrowers, granting them temporary forbearance to weather the storm,” says Dobrowski. The abatements and forbearance are burning off.”

In past, developers added apartments to active malls

Developers have proposed to redevelop more than a hundred malls into mixed-used properties with apartments—56 of these have been completed and another 75 are in the works, according to a count by Ellen Dunham-Jones, a professor of architecture at Georgia Tech. Another 120 defunct malls have been turned into things like sports areas, movie sounds stages, industrial sites or data centers.

“The properties that have experienced these transitions have traditionally been active malls,” says Dobrowski.

Successful redevelopments of closed malls have often been in strong locations, where the land under the mall is valuable enough to justify demolition and new construction. “What you really have is land—the land has to be appraised at a value that make the demolitions and construction worth it,” says Bob Barone of Partner Engineering, who has worked on many mall redevelopments.

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