In response to the WSJ article on Simon/Amazon and various questions, here’s a thread on malls, their anchors, and options (and challenges) for redevelopment. (1/20) https://www.wsj.com/articles/amazon-and-giant-mall-operator-look-at-turning-sears-j-c-penney-stores-into-fulfillment-centers-11596992863

The vast majority of malls have fragmented ownership, with a REIT or other large real estate company owning the ‘mall’ itself (the inline stores) and the anchors being owned by either the mall owner or the anchor company itself. (2/20)

The core concept for a successful mall is anchor(s) that bring traffic to the shopping center and provide inline retailers with higher foot traffic. In exchange for providing this benefit to the mall owner the anchors pay less rent psf & have additional contractual rights. (3/20)

As brick-and-mortar has become more challenged, owners have tried to keep their centers healthy & profitable. When their inline tenants struggle, they are replaced with more relevant offerings, new concepts, or ‘experiential’ offerings. The anchors are a different story. (4/20)

First, let us assume a single anchor – whose box is owned by the anchor company itself – goes dark. The anchor company almost always wants to sell the box (and surrounding parking), often to the mall owner itself but occasionally to another user. (5/20)

So what can you do with an empty anchor box? Unfortunately, they’re not much use for anything except what they were built for. Deep floor plates, windowless walls, and HVAC and plumbing designed for low-intensity use provide few options. (6/20)

The easiest choice would be to re-lease to another anchor tenant. But if one just went dark and sold you the box, odds of that are low. The occasional data center conversion will work – provided the zoning will allow for it (see Marley Station outside Baltimore). (7/20)

Residential is out (no windows, deep floor plates), office is out (same reasons), retail doesn’t work (or the anchor wouldn’t have left). Storage and/or logistics? Maybe, although usually the zoning and/or floor plates are problematic. (We'll come back to Amazon) (8/20)

Recalling that the main goal of the anchor spaces is to drive traffic for the rest of the mall (and that most easy conversions aren’t that easy), the highest and best use is almost always a tear down and redevelopment as some other complementary use. (9/20)

As a result, most anchor-owned boxes that go dark are sold to the mall owner, and the mall owners usually retain the dark boxes they already own. They then try to redevelop the anchor into a use that complements the rest of the center, or redevelop the mall altogether. (10/20)

Redeveloping a single box to a new use is the simpler option. The market, zoning, contractual rights and REAs of other anchors, & the goals of the mall owner will all dictate the end use. The other anchors probably have input on access, parking, use, and/or architecture. (11/20)

Where zoning (or rezoning) allows, multifamily is a common execution. Bringing residents to the site provides customers for the remaining retailers & new residents appreciate the retail offering. Good examples are numerous, and include AVB’s Hunt Valley deal. (12/20)

Office is less common from a market perspective but occasionally easier to accomplish if the underlying zoning is purely commercial (& if the municipality is adamant that it remain so, usually for tax reasons). An office tower is in the works for the Crabtree Valley Mall. (13/20)

Sometimes the mall owner feels that that the depth to the retail market is still there, but the existing mall setup is outdated and a full redevelopment is needed. Successful examples here include Kimco’s Mill Station and Forest City’s Ballston Quarter. (14/20)

The greatest challenges come when a mall owner wants to redevelop the entire center but fractured ownership or specific anchor contractual rights get in the way. Howard Hughes’ plans for the Landmark Mall in Alexandria were complicated by ownership issues for years. (15/20)

And Lerner’s plans at White Flint have (so far) been held in check by Lord & Taylor, who refused to leave their space and allow Lerner to redevelop the site into a mixed-use center. Their lease obligated Lerner to maintain the mall as a ‘first-class’ center until 2042… (16/20)

…and when Lerner ultimately demolished the rest of the mall, Lord & Taylor stayed, sued, and won a $30+ million judgement. (17/20)

As for the potential Amazon/Simon deal, Only Amazon knows whether the floor plates, column spacing, lack of windows and doors, and infrastructure of an anchor box provides a platform that they can (cost-effectively) convert to last-mile logistics. (18/20)

Even assuming for a moment that the space works physically, I’d imagine the greater challenge remains on Simon’s side. A logistics center isn’t going to drive much additional traffic to the other retailers on site, which means that anywhere Simon is willing to try this… (19/20)

…they have probably already ruled out other ways to generate foot traffic via releasing or redevelopment. So while the prospect of taking on Amazon as a tenant is probably attractive to them, it probably also indicates a challenging road ahead for those specific malls. (20/20)

One other key: most mall owners are REITs, and REITs are motivated to grow FFO - essentially, increasing cash flow. The one-off sale of an anchor box to another developer is a drop in the bucket; the (slow) creation of a cash flowing complementary asset moves the needle. (21/20)