GGP’s Mathrani Offers Bullish Take on the Mall Sector

GGP’s Mathrani Offers Bullish Take on the Mall Sector

General Growth Properties CEO Sandeep Mathrani doesn’t waste much time worrying about what’s going to happen to the company’s malls if one or another department store chain closes stores or goes bankrupt—his team is too busy trying to find enough space to accommodate retailer demand three years into the future. Speaking at the National Association of Real Estate Investment Trust’s REITWorld conference in Atlanta on Nov. 5, Mathrani noted that class-A malls have come back from the Great Recession in even better shape than they were before it.

He pointed to occupancies in the high 90 percent and double digit rental spreads as proof that top tier malls are experiencing a renaissance. Last year, retailer sales—one of the key measures of mall performance—were up 40 percent compared to their 2007 peak, Mathrani noted. New in-line tenants are coming in from Europe and Asia because they recognize the opportunity in Americans’ penchant for shopping at the same time as consumers in their home countries might be constrained by economic stagnation. Meanwhile, many domestic brands, including Victoria’s Secret and Nike, have been able to grow sales by launching new store concepts.

 “Demand is coming from all across the board,” Mathrani said. “We are actually leasing for 2016 and 2017 because we don’t have available space [right now]. So we are leasing two, three years ahead, which we’ve never done before.”

This is happening at the same time as new mall development in the U.S. has come to a screeching halt. Mathrani predicts that over the next decade, the country may see a total of five new malls added to the inventory, keeping demand for class-A space far above supply. For its part, GGP has put its focus on expanding existing mall properties and amassing a portfolio of high street retail locations in primary markets, including New York, San Francisco and Chicago. The latter strategy makes sense because of similarities between high end malls and high street flagship locations, Mathrani noted. The company  offsets the low yields such deals entail by buying properties with leases coming due, or those in need of redevelopment. Just last week, GGP teamed up with Ashkenazy Acquisition Corp. to buy a 20 percent stake in Miami’s Design District for $280 million. The property, valued at approximately $1.4 billion, already serves as home to Louis Vuitton, Hermes, Cartier and Prada, but the area is considered to still be in the transition stage, with ongoing construction.

Mathrani estimates that by 2020, roughly 15 percent of GGP’s assets could be high street retail properties.

Even the question marks hanging over some long-time anchor tenants may actually be opportunities in disguise, in Mathrani’s view. He expressed confidence that despite some recent missteps, department store chain J.C. Penny would still be around in five years’ time, albeit with a smaller store portfolio. As to Sears, although Mathrani would not speculate on Sears’ ultimate fate, claiming he would not bet against Eddie Lampert, he noted that getting real estate back from Sears would allow mall owners like GGP to subdivide the stores and lease them out at significantly higher rents.

“Sears is an interesting enigma,” he said. “It owns great real estate, and they pay $2 per sq. ft. on 100,000-sq.-ft. stores. So the biggest upside potential for us is to recapture that real estate.”

One thing that Mathrani does seem to keep a close watch on is the kind of debt GGP takes one, mindful of not repeating the mistakes of the last market cycle.

“We are a big believer in one asset, one loan, so if things go bad, you are not jeopardizing the company,” he noted. “We are completely against having unsecured debt.”

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