Who Buys a $100 Million Shopping Mall in the Middle of a Pandemic?

(Bloomberg Businessweek) -- Even before the novel coronavirus, Walmart and Sears had shut down their stores at the Baldwin Hills Crenshaw Plaza in South Los Angeles. The shopping center’s movie theater and many of its other retailers have been closed in recent weeks, too, because of a stay-at-home order. Some may struggle to reopen.

That didn’t stop developer CIM Group from agreeing to buy the mall for more than $100 million last month. The allure, like so much in real estate, came down to location: The shopping center sits at a soon-to-open light rail station. One concept is to convert the former Sears and Walmart into offices, which could help drive more foot traffic to the remaining retail. “This is what we do well,” says Shaul Kuba, CIM’s co-founder. “We try to figure out difficult situations and how to make them better.”

Investing at times of distress is a classic recipe for generating outsize returns. But it's a particularly risky strategy during a global pandemic that could permanently alter how we shop, work, commute, and go about our daily lives. And that's to say nothing of the near-term pain: With more retail bankruptcies on the horizon, higher vacancies are almost a given. Mall owners may never see about a third of the rent they’re owed this quarter, according to research firm Green Street Advisors.

Even Warren Buffett, who’s made billions being greedy when others are fearful, is circumspect about the state of retail. “If you own a shopping center, you’ve got a bunch of tenants who don’t want to pay you right now,” he told investors this month during the annual meeting for his conglomerate, Berkshire Hathaway Inc. “The supply and demand for retail space may change fairly significantly.”

CIM is not alone in trying to find a profitable way through this morass. The billionaire Reuben brothers from the U.K. recently agreed to pay almost $170 million for a retail property on Fifth Avenue in Manhattan. And Brookfield Asset Management, the Canadian property and private equity giant that owns dozens of malls, is planning a $5 billion fund that will take noncontrolling stakes in struggling retailers.

Most investors are running the other direction. In March alone, shopping center deals fell 47% from a year earlier, according to Real Capital Analytics. “Everyone is in a wait-and-see mode,” says Green Street retail analyst Vince Tibone. The pandemic is “pulling forward years of disruption.” While half of mall department stores might have failed in the next five years, partly due to the shift to online shopping, he says, “now we think it’s going to happen over two years.”

CIM’s interest in Baldwin Hills Crenshaw Plaza started before the virus upended life in the U.S. The real estate developer was one of a half dozen companies that bid on the property when it was put up for sale several months ago, says Kuba. Its offer wasn’t picked initially. But the first-choice buyer fell out of contract and CIM got a second opportunity in February. The developer kept working on the deal through March as the economy shut down, Kuba says, and ultimately signed a contract in late April.

He won’t say how much more than $100 million CIM is paying, but it’s probably less than the $136 million that Capri Investment Group spent to buy the mall in 2006. Over the years, Capri plunged millions more into the property as part of an effort to make it more upscale. It brought in a dance academy and overhauled the movie theater, which pro basketball star Magic Johnson had started in the mid-1990s. Capri also won approval to add residential units and a hotel to the site. Capri didn’t respond to requests for comment.

The change of course that CIM envisions hasn’t sat well with some locals. For decades, people have been trying to use the mall as a way to revitalize the area and overcome chronic disinvestment in South L.A.'s black community, which has been struggling more recently with displacement and gentrification. City Councilman Marqueece Harris-Dawson, who represents the area, was upset that CIM announced the deal without talking to his office first. Also troubling, he says, was how the developer seemed to be disregarding everything residents had talked about for years: “I hope that decisions about the mall’s future will again include all stakeholders, residents, and elected representatives.” Kuba says CIM always tries to do projects that “add to the fabric of the community.”

What exactly the mall becomes—including how much of it will still be a mall—is still an open question. But there is some precedent for an aging retail space being converted successfully into offices. The Westside Pavilion in Los Angeles, which also sits near a light rail stop, is undergoing a major renovation so that Google can move in. But even office demand is hard to gauge at a time when so many companies are having employees work from home. Kuba says CIM isn’t planning a glass tower for the site, but considering a “creative” office space that might draw tenants from the tech, entertainment, or medical industries.

He’s less certain about the retail. “Do I think that the movie theater is going to reopen? I have no idea,” says Kuba. “I can’t tell you what’s going to happen and who’s going to open or not. It’s not clear to me. But right now, my plan is if you can open and operate a retail store, I want you do that. I would like you to do that. I just don’t know how many of those tenants are going to be able to do that.”

That outlook suggests CIM is a lot more focused on the redevelopment potential than saving retailers. Because the mall sits in an “ opportunity zone,” doing something new on the site could make the project eligible for generous federal investment tax breaks. CIM declined to comment on whether it will claim the incentives. “You can almost consider it a land play,” says Jeff Langbaum, an analyst at Bloomberg Intelligence. “I don’t think anybody would be buying a mall now because they want to own a mall.”
 
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