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Bloomberg: Shopping-Mall Owners Pay Up to Stay Relevant in Amazon Era

According to Bloomberg:

The owner of the Newgate Mall plans to pour $500,000 into overhauling the outdated food court in a bid to lure restaurateurs and hungry shoppers. Rent payments from eateries are never going to recoup the renovation costs, but for landlord Time Equities Inc., that’s not the point. The point is survival.

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It’s more costly to build and maintain large, customized spaces that require extensive updates such as commercial kitchens. Landlords’ capital expenditures -- including repairs, remodeling and leasing costs -- are rising relative to the income being generated by retail properties.

As the retail business evolves, such capital expenditures will become more crucial in assessing property values, according to Green Street Advisors LLC, a research firm that covers real estate investment trusts. Many investors aren’t adequately accounting for the rising costs of maintaining a mall, Green Street said in its annual outlook in January. The real question is whether this is a temporary blip, or a new normal, according to Cedrik Lachance, director of U.S. REIT research at the Newport Beach, California-based firm.

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Department stores, the heart of suburban malls for decades, have been particularly hard hit by changing consumer tastes, leaving gaping holes in their wake. The departure of a center’s anchor tenant can easily spur an overhaul of the entire property.

“If Sears shuts down, you need to reinvent that part of the mall,” said Green Street’s Lachance. “Typically, when you reinvent one part of the mall, you redevelop the whole mall.”

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It can be difficult to calculate capital expenditures for malls because of poor landlord disclosures, Green Street analysts said in the January report. It’s a challenge to distinguish between deferred maintenance -- for example, fixing a roof -- and projects that will actually generate additional revenue at a property, the analysts wrote.

Giants such as GGP and Simon Property Group Inc., the largest mall owner in the U.S., are better positioned to absorb the increased costs than their peers that own less-desirable real estate, according to Green Street. The two companies have some of the most profitable malls in the country, and their high sales volumes make it easier to recover expenses.

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To read the full article from Bloomberg, click here.