We had a posting teed up for this week, ready to click the “publish button” today. Then we read an on-line article last night, one about the most visible retail real estate we have – shopping malls. So, for the first time in nearly 500 Ruminations blog postings, we are scrapping (actually delaying) our planned posting, one focused on the danger of just plopping in new text at the last minute without reading all of the “notwithstanding” provisions already in that document. Basically, we interrupt your regularly scheduled blog posting to bring you this important message, one written today.
The article appears in today’s New York Times under the headline: “With Department Stores Disappearing, Malls Could Be Next.” In another first for Ruminations, click HERE for a link to the article. We’ve never before linked to another publication. Though this is a newspaper article written from the transitory point of view of one author, she spoke with the largest operators in the United States. We don’t want to substitute our summary for the actual article. Two of the printed quotations should be enough to give our readers the “flavor.”
One arises out of Simon Property’s attempt to terminate its deal to acquire Taubman Centers. Here is one illuminating paragraph:
In court filings last month, Simon Property said that Taubman’s malls were mostly enclosed, and that indoor malls “are the last types of retail real estate properties that most consumers will want to visit on a long-term basis after Covid-19.” (Simon Property also owns many enclosed malls.) While Taubman has promoted its wealthy, educated shoppers as an asset, Simon Property said that those consumers, in particular, are now “far more able and likely to use online shopping.” The sides have been ordered to enter mediation but if an agreement isn’t reached by the end of the month, they will go to trial.
Here is another about another well-known operator of enclosed malls:
CBL & Associates Properties, which owns and operates roughly 60 malls, outlet stores and open-air shopping centers in the United States, said in filings last month that it was skipping about $30 million in interest payments due in June “to advance discussions with its lenders and explore alternative strategies,” and that there was “substantial doubt” it would continue to operate as a going concern.
[Long-term readers will also notice that this is the first time that Ruminations has named names in these blog postings. Our practice has been to anonymize names in our quoted material. Today, we break that rule because the prominence of the developers reinforces the message.]
This isn’t the only last-minute re-writing we are doing based on the cold water splash the New York Times article delivered last night. About a month ago, we refreshed a book chapter we contribute to a well-regarded real estate treatise. One of the topics we cover is “co-tenancy.” Perhaps, because “hope springs eternal” or because we are guided more by history than by vision, the “adjustments” we made were informed by the way things used to be. We ignored, overlooked, didn’t even think about the scenario the article posited. Though our book chapter discusses the risks presented by co-tenancy clauses to a landlord (and its lender) and also to tenants themselves, we didn’t take the long view. We didn’t consider three or four permanently vacant department store size spaces. Later today or tomorrow, we will revisit that co-tenancy section, though we don’t yet know what we will say.
We do know that we’ll return to one of our many mantras: “Who should bear the risk, or how should the risk be allocated?” There will always be tenants who want to remain in a mall even if it evolves into something very different than the one they first saw. There will be landlords who will be able to reposition their properties as retail leasing opportunities shrink. Perhaps, the current crisis will pass and brick and mortar retail will stabilize. Perhaps not. Our crystal ball has been in the repair shop since the day we got it.
Just as we need to revisit a single book chapter, all of us need to revisit our leases, mortgages, and other agreements. Actually, we need to revisit our thinking. Unlike a book chapter that is updated annually, we’re not going to be able to modify existing agreements without the cooperation of all parties. But, we still have a lot of opportunities as new deals come up, as amendments are needed, as crises arise. But, doing the same old thing won’t cut it anymore. We can’t sleepwalk through deals, relying on what always had worked. We need to be futurists. In this context, futurists and survivors may be synonyms.
Here’s one last thought. It goes back to a time when most readers hadn’t yet been born. There “once” was a device called a slide rule. [For those unfamiliar with these, Wikipedia will tell you too much if you click: HERE. https://en.wikipedia.org/wiki/Slide_rule] There were two kinds – ones made of metal, and ones made of bamboo. If you sat on the metal one, it was rendered difficult to use. It would still work, but no longer smoothly. It became somewhat herky-jerky. On the other hand, the bamboo ones, though generally more expensive, would flex and then return to their original “straightness.” They would bend without breaking. That is unless you went too far. If you did, they would snap. It wasn’t easy to break them, but it could be done.
That’s what has been happening in our head. We’ve been seeing the bamboo version of retail real estate. Until now, stress it and it always returned to its original condition. This time, however, we fear that we’ve gone too far. Our documents assume that all that is needed to “get back to where we were” is time. Readers, let’s consider that this may no longer be true (if it ever was). We need to offer solutions that contemplate the possibility, perhaps probability, that we will experience severe, irreversible shrinkage that “time” alone will not heal. We are facing the prospect that vacant spaces will never be re-let. But, we can’t let the bad chase out the good. The power to avoid Gresham’s Law [look it up] as applied to our industry is in our hands.
Watch for future blog postings as we develop some suggested strategies.
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