Consolidation is the hot topic at ICSC’s Spring Convention today. Several large companies are missing from the show floor, having been gobbled up by larger competitors. And everyone is waiting for the other shoe to drop regarding the hostile takeover attempt of Taubman Centers.
Industry executives interviewed in Las Vegas this week say that they expect to see the number of large mall owners could dwindle to less than 10 over the next 10 years. On the eve of the show, Pennsylvania Real Estate Investment Trust (PREIT) announced a $346 million deal to buy Crown America, nearly doubling its mall holdings, which are concentrated in the mid-Atlantic region. Previously, PREIT had purchased a group of six malls from the Rouse Corp.
Some executives, however, say today’s deals won’t lead to a fundamental restructuring of the industry. "It’s a cycle," says Randy Goodman, principal of Cleveland-based Goodman Real Estate Services Group. "The big mall REITs are just buying up properties to sell them off later."
On the other hand, the current consolidation in community centers may lead to the creation of new giants, like those in the mall business, says Scott Wolstein, CEO of Cleveland’s Developers Diversified Realty. His company recently purchased the JDN portfolio and he says he sees a lot of opportunity for consolidation in the community center sector.
"Most of the mall properties are already owned by the big companies. For us, it’s different," he said. "There’s a lot more property that’s still in private hands left to buy. It’s becoming less profitable for these private companies to run these properties. You have to achieve a critical mass of properties to achieve profitability. Ten million square feet is the tipping point."
Wolstein says that changes in retailing — especially the departure of marginal players — has helped rationalize the community center business. "There’s been tremendous consolidation among retailers. Five years ago, if you couldn’t get the best retailers into your property, you could bring in the second and third-tier retailers. Now, the first tier is all that’s left," he said. "We went through a period when a lot of new concepts were introduced. But all the venture capital supporting those new concepts has dried up. The only viable new concepts coming out are from today’s top retailers."
Goodman says that despite the rash of community center deals recently, he does not expect the trend to last. "Buying too many community center properties is hard to manage. It’s hard to manage and lease all these properties. Malls are the one property type that you can own lots of." Mall REIT tactics such as forcing retailers to take space in multiple properties doesn’t work on the community center side," he says. "You can achieve synergies with your retailers, telling them if you go into this center you have to be in these four others. But you can't force retailers into community centers."