Investing in Distressed Mall Properties Addressed at NRC EventLarry Feldman, president and CEO of NY-based Feldman Equities, discussed investing in distressed mall properties and turnaround strategies for underperforming properties at the May luncheon meeting of the National Realty Club held at the Williams Club in Manhattan.
The mall landscape is littered with the names of once great department stores that have succumbed to bankruptcy or are in the middle of down-sizing in an effort to keep afloat. Many malls have suffered substantially as Wal-Mart and Target continue to roll out their superstores. There are approximately 1,200 enclosed retail malls in America and a rough estimate is that one fourth of these malls are in trouble, at least to some degree. Some malls are witnessing eroding market share while others are experiencing massive vacancies and foreclosure.
Feldman Equities has been very successful with a strategy of investing in distressed enclosed retail malls, which most real estate investors have avoided mall turnaround plays for a variety of reasons, ranging from the fear of retail bankruptcies to the Wal-Mart juggernaut theory.
Typical candidates for the Feldman turnaround strategy are enclosed malls of 500,000 square feet and above that require gross investments (including debt, equity and upgrade costs) ranging from $25 million to $150 million. In almost all cases, the total costs of acquisition and renovation result in a total redevelopment cost well below replacement cost.
Distressed malls can be acquired and renovated at far below replacement cost, and these malls are often in very good locations. We approach each mall situation by coming up with a comprehensive strategic turnaround plan. The strategic plan almost always involves devising a strategy of "Wal-Mart proofing" the mall through an aggressive leasing campaign. The number one objective of the leasing campaign is to seek out new anchors and specialty retailers that don’t compete with Wal-Mart or the typical power center down the block.
The Feldman strategy involves attracting the right mix of specialty retailers which offer specialized products, not available at Wal-Mart. The strategy also combines these specialty retailers with an entertainment anchor such as a multiplex theater and a series of upscale restaurants.
EXECUTING THE FELDMAN TURNAROUND STRATEGY
In 2003, Feldman acquired the foreclosed Harrisburg Mall in Harrisburg, PA from Prudential Insurance for $17.5 million. Following a bankruptcy in 1999, the mall was put up for auction. There were no bids, so the mall reverted back to Prudential (the lender) who secured title to the mall with a total debt in excess of $45 million. In May 2001, JC Penney vacated their store. Prior to Feldman’s acquisition, the JC Penney vacancy, combined with the Lord & Taylor vacancy, brought the mall to an effective occupancy of 50%. The property was in grave danger of being demolished for land value.
Concurrent with the acquisition, Feldman signed two new anchor leases and renewed a lease with a third anchor totaling over 590,000 square feet. The new tenants include Bass Pro Shops, which signed a long-term lease for space vacated by Lord & Taylor. Bass Pro is renovating and expanding the former Lord & Taylor store to convert it into a spectacular super store consisting of approx. 200,000 sq. ft. of fishing and hunting products. Excluding their flagship store, the Harrisburg store will be the largest Bass Pro store in the nation. Boscov’s department store also signed a long-term lease for the former JC Penney store.
In addition, an existing tenant, Hecht’s (a division of the May Company – NYSE: MAY), made a long-term commitment to the mall and extended their lease to 2024. The expansions of Bass Pro and Boscov’s will result in an overall mall size of over 900,000 square feet.
Bass Pro Shops is one of the strongest sporting goods retailers in the U.S. The typical Bass store averages over $400 per square foot per annum in sales. The key reason for this very high level of sales is the fact that Bass Pro Shops is also an entertainment destination. The Harrisburg store will feature a 40,000 gallon aquarium, rock climbing walls, waterfalls and an indoor shooting & archery range.
The typical store draws up to three million visitors annually. That figure will make it one of the largest tourist destinations in the state of Pennsylvania. Because of the new tourism-related jobs that will be created and the taxes that will be generated, Feldman arranged for a multi-million dollar grant from the State of Pennsylvania, as well as special tax incentives from the township, county and local school district. In addition, Feldman arranged for the Pennsylvania Department of Transportation (PENNDOT) to provide a direct exit ramp to the property from Interstate 83.
ATTRACTING JUNIOR ANCHOR TENANTS
Feldman Equities also likes to fill its malls with a series of junior anchors with specialty products not found at Wal-Mart stores. This strategy solves several problems at the same time. First, by filling the mall with a series of "big-box" specialty retailers as anchors, the mall is less dependent on traditional department stores that have been steadily losing market share to the discounters. Also, by filling the mall with a series of smaller junior anchors, the solvency of the mall is less threatened by the potential bankruptcy of a large department store or a decision by a department store to shut down a particular location.
Attracting the right tenant mix is just part of the Feldman turnaround strategy. Effective capital investment is also key to the success of a mall turnaround. These investments vary from project to project, but include a) the renovation of exterior façade of the mall, (b) the renovation of the mall entrances, (c) an upgrade to the mall’s common area corridors and lighting, (d) the mall’s entire parking lot will be resurfaced and re-striped and (e) the mall’s signage will be significantly upgraded.
In addition to renewing profitable high-volume tenants at the best possible market rents, the re-leasing process also includes weeding out unhealthy, low volume or unprofitable stores in a proactive way that allows failing tenants to cut their losses by buying out of their leases and applying the resulting short-term income towards incoming tenant inducements.
Successful mall turnaround also includes improving visibility of key tenants, constructing new entrances or implementing ways to improve shopper circulation throughout the property. It also involves intensive marketing programs geared to the local trade area and promotional activities that assure a constant flow of events occurring at the mall, such as musical performances, sports promotions, radio station events and hosting other civic and charitable functions
About Larry Feldman
Larry Feldman is known for his depth of experience in all facets of real estate, including development, construction, leasing, management & finance. He is well known in the real estate industry for his proven track record of turning around underperforming property through extensive renovation, aggressive promotion and lease-up.
Larry Feldman has been the president and CEO of Feldman Equities, Inc. since 1990. Larry and his father Edward Feldman formed Feldman Equities in 1985. Feldman Equities traces its roots to a continuing family owned real estate company that was founded by Larry Feldman’s grandfather, "HJ" Feldman, in 1920.
During the mid 1980's, Larry Feldman was primarily a developer/builder. During this period, he developed several major properties in the metropolitan New York area, including a 40 story office tower in Manhattan known as Tower 45. Over the last 15 years, Larry Feldman and his father Ed developed or acquired over 10 Million sq. ft. of office & retail properties with an aggregate value in excess of two billion dollars.
