A REITailing Perspective

 

As the ensuing soap opera unfolds between Simon Properties, General Growth, and any other potential bidders, it’s worth taking a look at what a hypothetical combination of the two mall operators would look like from a retailers perspective.  A combined Simon/General Growth would own 1/3 of all mall space and virtually all ‘A-list’ properties.  Common logic says this is bad for retailers. We’re not so sure that’s the case – at least not for the good ones.  Here’s why…

 

A combination of the two would yield substantial control over U.S mall properties, with the combined entity owning 520+ centers and over 445 million square feet (not assuming any assets are sold as part of the deal).  To put that in perspective, the combined company would own approximately one-third of all mall-based/outlet store retailing in the U.S with a size approximately two-thirds of Wal-Mart’s domestic square footage.  So the obvious conclusion to make is that retailers will get squeezed on rents and will have one massive landlord to deal with.  However, one could argue that there is an efficiency to be had when dealing with one major landlord.

 

Historically, large companies such as The Limited or Gap have built large real estate teams to deal with multiple developers, regions, projects, brands, and geographies.  Even in the absence of true growth, there are hundreds of variables that need to be dealt with on the real estate front when it comes to retailing.  Whether it be lease renewals, store closures, or store remodels, the real estate component of retailing is 1) integral and 2) complex.  As such, even the most efficient retailers are dealing with numerous mall owners and landlords given the disparate ownership of the mall base and shopping center universe across the country.  Now along comes the mega-landlord.

 

All of sudden there actually may be a strategic benefit to dealing with the owner of one in three malls in the country, not to mention essentially every  A-list retail property.   Leverage certainly comes from both sides of the negotiating table, but the ability to plan and strategize a portfolio of say, Gap locations, from mall to mall with one owner could be meaningful.  Maybe Gap is looking to improve their position or downsize stores in a few malls, while looking to close stores in another mall. If this can be accomplished by dealing with one partner, there has to be some level of efficiency.  As it stands now, these discussions and planning sessions take place repeatedly with numerous landlords, over and over on a one-off basis. 

 

The game changer here is that the number of chess matches needed to manage a retailer’s store portfolio in theory should be reduced if a majority or large portion of their leases are held by one entity.  Partnering on such a grand scale is totally new to the retailer/mall-owner relationship and something that makes a ton of sense (in theory). Just ask most companies that do business with Wal-Mart. Is WMT evil just because it is so darn big? No. Margins might be tight, but they pay very quickly, and for an efficient vendor Wal-Mart tends to be among the highest return business partners. It’s the marginal vendors without a meaningful proposition (or Macro process) that end up getting pinched.

 

The risk of course is that the power of the mega-landlord leads to strong-arming on rent.  While this may seem obvious, the symbiotic relationship between a retailer and its landlord is really one of chicken and egg proportions.  This is especially true in the current environment, where growth in retail units and new concepts has slowed to a halt.  Landlords cannot afford to risk losing tenants at the expense of jacking up rents.  After all, what is mall really worth with numerous empty store fronts?  There are only so many movie theaters, kiosks, and food courts that can be positioned to mask vacancies.

 

Whether “the” deal or “a” deal goes through or not is really not up to us speculate on.  However, as the formation of a mega-landlord develops, it’s worth asking the questions about what this may mean down the road for those that make their living in the mall.  At first glance some may be skeptical of bigger is better in this case.  However, it appears that this may actually be a win from a strategic retail standpoint.  Yes, the weak economy and sluggish mall-traffic have swung the pendulum back to the retailer on lease costs for now, but the real opportunity lies ahead in the efficiencies of strategic planning and portfolio management, one-to-one. 

 

-Eric Levine

Director


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