Page 33

CRE Finance World, Summer 2014

A publication of Summer issue 2014 sponsored by CRE Finance World Summer 2014 31 built in the 1960s and prior. The average center in the distressed group was built in 1983 and had a vacancy rate of 50.6%”21. As noted by Moody’s22 and REIS23, the gap between strong and weak malls has grown. Dominant malls serving an affluent demographic profile are thriving, while those in weak trade areas with poor population density and/or low household income are suffering. Moreover, it is precisely the weaker class B and C malls that are oversupplied and have higher vacancy rates. Large mall REITS recognize the divergence and began spinning off or selling lower producing class B malls in 2012. In early 2012 General Growth Properties (GGP) spun off 30 such malls in to the Rouse Properties REIT. In April, 2012 Westfield Group began selling partial or full stakes in class B mall properties to Starwood Capital Group and O’Connor Capital Partners. In September 2013, Westfield Group agreed to the sale of seven more malls to an affiliate of Starwood Capital Group LLC24. In December 2012 Macerich put 17 “non-core” malls up for sale25. On December 13, 2013; Simon Property Group announced that it plans to spin off stakes in 44 smaller enclosed malls and 54 strip centers in to a new REIT. Simon will focus on large, regional malls that serve wealthier consumers26. Older less desirable class B and C malls have a high degree of physical, functional, and economic obsolescence. These malls are particularly vulnerable to the impact of declining household incomes and income inequality as they have been catering to middle and lower income Americans. They are now facing an additional threat in the form of e-commerce. III — E-Commerce Retail formats evolve over time in response to changes in technology, lifestyle, and other disruptive trends. Post World War II suburbanization and the proliferation of the automobile shifted US shopping patterns away from center city department stores that had been dominant in US cities for decades. Suburban malls replaced downtown department stores in urban centers. Wal-Mart emptied small towns of their general stores. E-commerce will likewise reshape shopping patterns. E-commerce started slowly with people ordering items from their home or office computers. Sales grew as home computers became more commonplace and consumers became comfortable with online purchases. The release of the iPhone in 2007, the iPad in 2010, and other hand held devices accelerated the trend. The ability to shop while using a physical retailer as a showroom and ordering a product for less money from a hand-held device or shopping from one’s couch has made e-commerce more compelling. The share of total sales attributable to e-commerce has surged to 6.0%27 from approximately 0.5% at the end of 1999.28 E-commerce sales increased 16% year over year in Q4 2013 compared to 4% growth for total sales. Online sales account for almost 8% of the total ex-auto sales. Chart 8 E-Commerce Sales as Percentage of Total Sales Source: Retail Indicators Branch, U.S. Census Bureau Challenges Confronting US Retail Properties


CRE Finance World, Summer 2014
To see the actual publication please follow the link above