The Government May Want To Buy Your Dying Mall (#GotBitcoin?)

Local governments worry that dying malls will blight the landscape, so they are buying them up. The Government May Want To Buy Your Dying Mall

Local governments across the U.S. are taking over dying shopping malls.

These municipalities, concerned that vacated retail centers will blight the landscape and drag down surrounding property values, have been buying up malls they fear are being starved of capital by the private sector.

Governments often rely on land banks to fund the purchases. These government-backed or quasi-public entities are usually used to acquire derelict homes and lots through tax foreclosures when it is clear that no private investment is forthcoming.

“As we recovered from the recession, the market has reabsorbed some properties but not in the smaller communities that never recovered,” said Frank Alexander, co-founder and senior adviser of the Center for Community Progress, which promotes land banks. “In those places, we’re getting more questions about how to deal with abandoned shopping centers.”

Diverging Fortunes

Malls in affluent areas have fewer vacancies than those in lower income areas.

Real-estate analysts say that tabulating the number of takeovers is difficult, in part because government buyers aren’t always easily identifiable. Yet a number of analysts believe this is a small but growing trend in cities with failing malls.

In May, for example, the Clark County Land Reutilization Corp. purchased Upper Valley Mall in Springfield, Ohio, for $3 million.

“Nothing was being done in our opinion,” said Thomas Hale, executive director at the Clark County land bank. “This is just one project we felt we had to protect.”

J.C. Penney Co. and Macy’s Inc. closed their Upper Valley stores in 2015, but other mall staples including Sears Holdings Corp. and Foot Locker still operate. Mr. Hale said he is in talks with potential investors to redevelop the property into a mixed-use site that could include housing, a soccer field and a smaller retail presence.

In other instances, governments opt to get rid of retail entirely. The City of Memphis purchased Raleigh Springs Mall and demolished it last year to build a new community center. The $28 million Raleigh Town Center, which will have a library, police and traffic precinct, an 11-acre lake and a skate park, is slated to be completed June 2019.

While malls in wealthy neighborhoods continue to attract shoppers and tenants, growing government involvement with shopping centers in less affluent areas is another sign that private investors may be losing interest in the worst performing malls, even ones that can be had at cheap prices.

“It’s a new issue,” said Thomas Dobrowski, executive managing director of capital markets at real-estate services firm Newmark Knight Frank . “When a mall gets to a point of no return and when no private buyer is willing to reinvest in it, it comes down to the value of the dirt.”

Still, government takeovers face many challenges. Malls and department stores often have large, unwieldy footprints, making it tougher to propose another use for them.

“For big boxes in particular, there are limited uses of that space,” said Michele Wildman, executive director at Genesee County Land Bank.

The Genesee County Land Bank in Flint, Mich, currently has a list of 58 commercial properties for sale, including a 101,900-square-foot former Kmart store. But the lack of windows and the large floor plate makes it difficult for such properties to be converted to other uses such as housing.

Plans to reposition malls can also get bogged down if city council members and residents don’t agree to proposed new uses. Some could also be razed when structures are found to be unsound. It can also be complex and time-consuming to buy back malls if multiple parties own different portions of the real estate.

But various obstacles haven’t stopped some municipalities from trying.

In north St. Louis County in Missouri, a local economic development board last year filed a condemnation petition saying that Jamestown Mall, a 1.2-million-square-foot property, poses a health hazard after regular break-ins and other problems. “On at least one occasion an individual drove into a sink hole at the site parking area and needed to be rescued,” according to the lawsuit.

The petition sped up negotiations for a deal between the remaining owner and the St. Louis Economic Development Partnership, which had been acquiring pieces of the mall since 2015. The development board bought the final piece eventually. It is now in talks with a developer who has plans to demolish the current building and develop a logistics center there.

“I’m hoping we can move it along for the community,” said Sheila Sweeney, chief executive officer at St. Louis Economic Development Partnership. “People really want something to happen, but right now it’s sitting there decaying.”

Update: 10-4-2018

Mall Vacancies Are Highest in 7 Years After Big-Box Closings

Rising shopping mall vacancies across the U.S. are driving down rents, signaling that many retail centers continue to struggle despite the country’s strong economic growth.

Rising shopping-mall vacancies across the U.S. are driving down rents, signaling that many retail centers continue to struggle despite the country’s strong economic growth and buoyant consumer confidence.

The average rent for malls in the third quarter fell 0.3% to $43.25 a square foot in the third quarter, down from $43.36 in the second quarter, according to data from real-estate research firm Reis Inc. The last time rents slid on a quarter-over-quarter basis was in 2011.

Vacancy rates for malls also continued to climb, rising to 9.1% in the third quarter from 8.6% in the second quarter. That is the highest the vacancy rate has been since the third quarter of 2011, when it hit 9.4%, according to Reis.

“The retail sector is still correcting,” said Barbara Denham, senior economist with Reis.

This soft spot stands in contrast to much of the rest of the U.S. economy, where robust job growth and a solid economic outlook has boosted consumer and business sentiment. Consumer confidence hit an 18-year high last month, the Dow Jones Industrial Average set another record on Tuesday and a new trade deal with Canada and Mexico has buoyed business sentiment.

Some retailers such as Target Corp. and Nike Inc. have benefited from rising consumer confidence this year and posted strong earnings growth. Their share prices have risen by nearly a third in the year to date.

The National Retail Federation on Wednesday said it expects holiday retail sales in November and December to increase by 4.3% to 4.8% over last year. The forecast, which excludes cars, gasoline and restaurants, compares with an average annual increase of 3.9% over the past five years, the NRF said.

But many lower-end malls have struggled to benefit from the broader revival, especially in some of the more economically depressed areas in Pennsylvania, Ohio and Michigan that suffer from a glut of shopping centers.

Department-store closings from Bon-Ton Stores Inc. and Sears Holdings Corp. in the third quarter accounted for much of the jump in the vacancy rate, Reis said, though a number of owner-occupied Sears stores were excluded from the numbers, since they don’t have leases.

“Any mall that is worried about a Sears or Macy’s closing has bigger issues,” said Alexander Goldfarb, a senior analyst at Sandler O’Neill + Partners LP.

Not all shopping centers are under pressure. Malls in wealthier neighborhoods with less competition still draw affluent shoppers and continue to attract tenants. The better-located and higher-end malls are adding “new uses like restaurants and theaters,” Mr. Goldfarb said, that bring in customers.

Retailers are also scrutinizing their bricks-and-mortar footprint and investing more to develop their online presence to cater to a wider pool of shoppers who use different channels. In the second quarter, e-commerce sales accounted for 9.6% of total retail sales after adjusting for seasonal variations, from 9.5% in the previous quarter, according to data from the U.S. Census Bureau.