Appraisal Matters

Older regional malls face a quandary.  They need to be renovated to keep competitive with newer regional malls, yet this is a very expensive proposition that rarely is financially feasible.  That’s the Catch 22.  Even with good demographics, there are certain typical realities that prevent older regional malls from going forward that are recognized by prospective tenants, but often overlooked by owners.

The Traffic Volume Factor

Most people believe high traffic volume is one of the most important mall dynamics for long-term success.  Older regional malls that are located in heavily developed areas (i.e. not what I would term “interstate mall”) fit into this category.  Like the saying goes, too much of a good thing is not a good thing.  Why?

• Traffic volume above 50,000 vehicles per day on non-Interstate highways creates a perceptional barrier between locations that would otherwise be considered fairly close or comparable.
• It is not just the traffic volume that slows traffic.  Equally important is the fact that there are many traffic lights along these roads, frequently resulting in traffic light backups and further increasing travel times.
• Most of these roads face the problem of insufficient traffic lanes to handle so much traffic.  With retail on both sides of the street, it is not financially feasible for local government to expand the road.  This is mostly the problem of four-lane roads, two lanes in each direction.
• The high traffic volume is prized by fast food restaurants and other types of pad site retail.  Ironically, what you find is that there is typically not enough land available for pad sites, the amount of frontage is too low or the topography is such that visibility is too limited to attract them.
• A high congestion factor creates an important customer perceptional dynamic.  They tend to view a congested corridor as separate markets.  This creates a situation where the trade radius of an older mall shrinks, frequently to the point where it is considered a “locals” mall.

The Physical Factor

Older regional malls that have not been modernized to current levels have great difficulties attracting the high credit anchors they want.  New malls are more physically appealing and they have a superior tenant mix, placing older malls at a significant competitive advantage.  Newer malls that are well anchored have much higher sales per square foot and this is the single most important key yardstick that tenants use to determine if moving would be financially feasible (or being “first in market” for that chain).  Typically, renovations that have occurred over the prior five to ten years are cosmetic and do little to increase foot traffic.

The Common Area Cost Factor

Another factor that makes it difficult for new malls to attract high credit anchor tenants is simply the cost.  Heating and cooling are a major component of a mall’s common area maintenance expense and this is passed on to the tenants, so higher cost malls are at another competitive disadvantage.

Improvements in central HVAC systems have made newer malls noticeably more energy efficient.  The layout of older malls is also a problem because there is no workaround to having lots of long wings, as is evident in the dumbbell or double-dumbbell shaped mall.  Frequently, multiple systems are necessary, thereby eliminating economies of scale and increasing repair and replacement costs.  To make cost comparisons, compare the number of zones to their square footage; the higher this ratio, the higher the energy costs.  Newer malls also make better use of light for heating with blinds or tinting to keep costs down in the summer, so this also needs to be factored into this ratio.

The Food Court Factor

The importance of food courts have increased over the past two decades.  The ratio of food court square footage to inline bay or total mall net rentable areas is another important ratio; obviously, the higher the better.  The overall number of food court tenants and the number of nationals present are also very important.

The trend has been for food courts in newer malls to have high ceilings and lots of natural light.  Although it may not seem important, try eating at one or two of these in a row and then going to a traditional mall where you can look up and count the ceiling tiles just above your head.  People notice.  In my opinion, there is some degree of functional obsolescence here, which explains why all new malls are designed using height and light to best advantage.

Catch 22

So older regional malls have lower sales per square foot and higher common area maintenance costs.  Frequently traffic volume and patterns reduce the radius it can draw from.  So even if the mall is renovated, it is extremely difficult to recoup the cost, hence what we see are partial renovations that focus on cosmetics.  The problem is that prospective retail tenants recognize the dynamics and even with a face lift, they are very hesitant to commit.  Their response is “show me higher average sales volumes”, which is a Catch 22 with only cosmetic renovations.  Even if sales volume increases, the higher costs associated with the mall result in a lower negotiated rent.  So again, mall owners are faced with a difficulty in justifying the costs of a full renovation.  That’s why they need one or more new anchors, yet the particular location matrix of an anchor will generally preclude a regional perceived as a “locals” mall.

I don’t see a solution to this problematic cycle.  Maybe that’s my Catch 22.

John Simpson, MAI