Simon Property Group is turning its attention to revamping its second-tier malls across the United States, joining fellow retail landlords in trying to seize untapped growth potential.
CEO and Chairman David Simon said the real estate investment trust is filling vacancies and bringing in new kinds of tenants — such as healthcare facilities — to its lower-performing, so-called Class B properties after focusing for some time on its biggest properties, Class A malls. There's an opportunity with the outdated malls, properties that remain "important assets" in their communities, according to Simon.
"Frankly, we've been organizationally very focused on — for no better word — the 'A's,'" he said, addressing analysts and investors on Tuesday about the REIT's latest financial results. "We do think there's real-effort-focus growth for us in the 'B's,' where we're investing our dollars. So that's a big program for us in '25 and '26."
The Indianapolis-based company, the nation's biggest mall owner, has already been spending on redeveloping its stronger properties, such as Phipps Plaza in Atlanta and updating The Galleria in Houston. In describing the new initiatives at malls with slower sales and foot traffic, Simon cited changes at the Smith Haven Mall in Lake Grove, New York.
"So it's a combination of adding [tenants], updating the look, feel of the place, restaurants," he said.
With virtually no new malls being built, retail landlords are overhauling the ones they have — now even the older ones, which are typically in good locations — to try to capitalize on the properties, according to industry analysts.
Those efforts range from demolishing all or part of a shopping center, replacing vacant department store anchors with new types of occupants, and reimagining the sites as mixed-use venues with housing, hotels and office space in addition to retail. Giant discounter Walmart recently purchased a once-busy mall outside Pittsburgh, that its new manager described as a "dead zone," and plans to redevelop it.
Going from 'B' to 'A'
"It is not difficult to turn a B+ mall into an A- mall through redevelopment, re-leasing, consumer marketing, etc.," Rudolph Milian, president and CEO of retail consultant Woodcliff Realty Advisors, said in an email to CoStar News. "Simon, with its very powerful leasing resources, certainly has the ability to identify and attract highly productive retailers to replace underperforming retailers through lease expirations."
He added that Simon can also buy out tenants "to replace them with more productive tenants that will pay higher rents. Achieving better sales also pushes demand from the most desirable retailers. This alone can turn a B+ mall into a Class A- mall."
But with shopping habits changing, and competition increasing from online rivals, it remains to be seen whether Simon and other retail landlords will find the right formula or mix to fuel success at their second-tier locations — and get a proper return on their investments.
"Upgrading B malls can drive foot traffic, but success depends on strategic investment, tenant mix, and location," Anjee Solanki, head of U.S. Retail Research at real estate services firm Colliers, said in an email to CoStar News.
She explained that "while experiential retail, mixed-use elements, and better merchandising can revitalize some properties, the costs are significant, and not all struggling malls will survive in their current form. With department stores continuing to decline, we’re seeing a shift toward grocery, off-price, and entertainment anchors, but e-commerce and consumer spending pressures remain challenges. Selective redevelopments that integrate residential, entertainment, and lifestyle components have the best chance of long-term success."
Rating a mall from A to C is "based on a few factors such as tenant mix, location, trade area dominance, but the most important factor is average sales per square foot," according to Milian. There are an estimated 300 Class A or top-tier malls in the United States, boasting high-end tenants, low vacancy rates and strong foot traffic, and roughly 1,100 malls overall.
Smith Haven changes
At the Smith Haven Mall, Stony Brook Medicine has opened an outpatient facility in a 170,000-square-foot former Sears location. Simon referred to that new tenant in his remarks. The REIT also just signed a lease for a big-box retailer for the mall, according to the CEO, who declined to identify it. Primark has also joined the tenant roster, and Golf Lounge 18 will open a 9,000-square-foot location there in March.
Smith Haven Mall, located in eastern Long Island, New York, over the next few years will be "a renovated, rejuvenated asset," according to Simon.
"Because of all the progress we've made in the bigger [malls,] we're able to kind of reenergize our focus on an asset like that," he said. "The list of those is long."
He added that he expects a 12% return as a result of the Smith Haven investment over the next couple of years.
Simon's strategy makes sense, according to Kristin Mueller, president of Retail Property Management at JLL. Landlords such as Simon have finite resources, meaning they will first funnel capital to trophy assets where it will have the most impact, she told CoStar News.
"When you've done all of your best work there and you've got more capital to place, you're going to go to the next opportunity," Mueller said. "It's not unlike when an investor is first looking at the major markets and then moves into the secondary markets. ... It's the same sort of waterfall approach."
Reinvesting in properties like Simon is doing "is necessary for survival in the retail space, so some of this is just par for the course of running a retail real estate portfolio," according to Brandon Svec, national director of U.S. retail analytics for CoStar Group.
"That said, it can also be taken as a sign of the significant improvement seen in mall fundamentals over the past couple years," Svec said. "Occupancy across Simon's portfolio is up over 96% and so they are likely seeing the market grow tight enough that the investment into mid-tier malls would be worth it as the demand for the space has risen and the potential rent gains achieved have grown. It is indicative of a market where demand remains strong and space options are limited, resulting in greater financial incentive to improve properties and tenant mixes."
Walmart jumps in
Bentonville, Arkansas-based Walmart acquired Monroeville Mall in Monroeville, Pennsylvania, near Pittsburgh from CBL Properties in January for $34 million. The retailer has tapped Dallas-based Cypress Equities to manage the property and oversee its redevelopment. That process could include demolishing all or part of the property or adding new uses such as housing, Cypress Equities CEO Chris Maguire told CoStar News.
He said mall ratings outside of Class A were "pretty murky," but described Monroeville Mall as "kind of a dead zone." Outdated malls can't survive without redevelopment, according to Maguire.
"Most of them have too much interior shop space for the current environment," he said. "There's just not enough fashion [retail], which has been the primary user of that, to go into those malls. So what have we seen? They're trying to put restaurants. They're trying to put entertainment, fitness, all of those things that typically haven't been inside an enclosed mall. "
Cypress will be undertaking that assignment for Walmart at Monroeville, which Maguire said has a very good location.
"As you heard from David Simon and we're going to hear from others — retailers and the like — these B malls need to be redeveloped," he said. "And it's very difficult to find great real estate that can be developed and infill in these markets. So we hope that that this exercise that we're we're going through with Walmart will be successful and create that vibrant retail environment for the community for the next 40 years, even though it hasn't been great for the last 10."
Simon expects to spend $400 million to $500 million on major mall redevelopments by working with joint-venture partners in fiscal 2025, according to the REIT's CEO. That includes adding residences, hospitality and office space to retail properties, Simon said.
For example, a hotel is planned for Roosevelt Field in Garden City, New York, and a hotel expansion slated at The Domain in Austin, Texas, according to Simon. Simon will also be adding office space to The Shops at Clearfork in Fort Worth, Texas, he said, which CoStar reported on in November. And housing is planned for Brea Mall in Brea, California.