How to save a dying shopping mall

Some investors are buying such centres cheaply and trying to turn them around

The Hudson Valley Mall, nestled on a picturesque hilltop in Kingston, New York, looks like a pleasant place to spend an afternoon — from the outside. Inside, it just feels empty.

Until recently, the 765,000-square-foot structure was best known for its infamous past as the scene of a Columbine-inspired shooting in 2005, when a local gunman fired off 60 rounds from an assault rifle. J C Penney and Co shuttered its store in 2015, and Macy’s Inc closed its doors last year. Smaller retailers followed, and as of February 2016, 33 per cent of the mall space — not including anchor stores — sat vacant, according to Bloomberg data.

The property, which was appraised at a value of $87 million in 2010, sold for $9.4 million in January to Hull Property Group, an Augusta, Georgia-based operator that has spent the last decade bringing distressed malls back to life. The company, which owns 29 malls across the US, sticks to a proven script that includes negotiating tax incentives with local governments, demolishing excess space, and reversing public perceptions that the property is struggling.

“If the grim reaper hasn’t come yet, then he’s circling pretty good,” said Hull, describing the properties he targets. 

Buying malls on the cheap leaves Hull with plenty of money for aesthetic improvements, such as raising the ceilings and removing kiosks in a bid to create long sight lines and a sense of open space. Other tactics include hanging sheetrock over empty storefronts and ending leases with downmarket tenants in hopes of attracting more upscale retailers.

Hull is one of a small crowd of operators bucking the conventional wisdom that there are simply too many malls and that only those catering to wealthy shoppers will survive the death of legacy retailers. While operating strategies vary, most are shopping for older malls in places with no other enclosed shopping center within 50 to 100 miles. 

Such older properties have some inherent advantages. Many were built as the surrounding community was sprouting, so the original developers had their pick of the best locations. Despite the rise of e-commerce, people still come to malls to participate in the social aspect of shopping — especially in suburban or exurban places with few large gathering places. 

Andy Weiner, president of Houston-based RockStep Capital, paid $28 million when he bought the Bonita Lakes Mall in Meridian, Mississippi, in May, a fraction of the $85 million it cost to build when it was completed in 1997. Weiner, who has acquired about six million square feet of mall space over the last two decades, says his mission is “to make small-town America better”. His company is now working to revive the facility by upgrading the movie theatre and bringing in the non-traditional tenants — a community college, say, or a government office —that mall operators are increasingly courting in hopes of increasing foot traffic. Over the longer term, Weiner is betting that he can make money by passing on discounted rents to retail tenants.

“If you own it at 20 cents on the dollar, you can provide tenants with very profitable stores, because you can give them cheap rents,” he explained.

© Bloomberg