I know it’s simply human nature to want the best of the best, and to prioritize top quality. And, it’s certainly no different in our industry. Lately, analysts and investors seem to be spending an awful lot of time and energy focusing on only the “top” properties and brands. I think they may be a bit short sighted and could even be missing out on some great opportunities. I’m talking about the ongoing debate between “A” and “B” malls.
I’m encouraged by the recent announcement from General Growth Properties Inc. spinning off 30 of their “B” malls from the rest of their portfolio. I think it’s great to finally have some attention paid to these properties with often very real potential. The new REIT, Rouse Properties, Inc., is really the first of its kind to focus exclusively on “B” malls. They have the right mix to do big things: a seasoned management team with capital. The properties in their portfolio span the country from Minnesota to Louisiana, Arizona and North Carolina, and include locations in metro markets like Southland Center in Taylor, Michigan (just outside of Detroit), and smaller markets like Silver Lake Mall in Coeur D'Alene, Idaho. Most of them — 60%, in fact — are the only game in town for 120 miles. To be honest, I’m excited to see what they do with these malls. I think it’s quite possible they could be the consolidator of B malls throughout the industry.
Unlike “A” malls, “B” malls have traditionally been viewed as riskier propositions for both retailers and developers alike. But, I think — and always have thought — that there can be real value in “B” malls, especially with the current state of the “A” mall marketplace where demand is higher than supply and the prices are bordering on outrageous. Many “B” malls are in “A” locations along major thoroughfares where they enjoy terrific visibility and steady commerce. Most are even surrounded by well-patronized neighbors — restaurants, strip centers and power centers. I’ve stated before how “B” malls have one specific challenge: they tend to have too much small shop space. The good news is investors oftentimes have the opportunity to reconfigure that small shop space into larger spaces (perhaps ideal for the shrinking big box stores we’re seeing?). Many of these locations have real lease-up or repositioning potential. It’s that potential that makes these locations worth considering.
To me, having an influential new REIT focused exclusively on what are considered “undervalued” opportunities is significant for our industry. For retailers who are already at capacity in most primary markets or who are bumping up against increasingly high rental rates, these are the kinds of locations that can kick off the next wave of expansion. And while not every “B” mall is an investment opportunity, I see some real reasons for optimism for many of these spaces. Generally speaking, these are not malls that have gotten a lot of owner focus in terms of investment and financial support over the last few years. Now that they have that support, there is a much greater chance that they will realize their potential. While it will take real investment and focus to make that happen, many of these locations have a built-in consumer base just waiting to be relieved of that 30-minute drive to larger regional destinations just to get the necessities. Capturing those local consumer dollars and kicking off a self-reinforcing cycle of investment, development and growth will be key to sustaining momentum in these markets.
In past development cycles, we’ve seen “B” malls emerge as solid opportunities for investors, developers and retailers who were able to capitalize on the industry’s preoccupation with “A” locations. For the first time in quite awhile, we are starting to see that same dynamic in play, and retailers are being presented with an opportunity to expand into some relatively untapped markets at a reasonable price. While it remains to be seen if this “B” mall buzz will grow louder, I like what I am hearing so far.
What do you think? Please make a public comment below or feel free to e-mail me privately at email@example.com.
Jeff Green is president and CEO of Phoenix-based Jeff Green Partners (jeffgreenpartners.com), a leading consulting firm specializing in retail real estate feasibility, retail expansion planning, medical retail planning, location analysis and commercial land use.
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