Ever since the mid to late 20th Century when modern malls were first developed, anchor tenants have controlled much about how these retail centers operate. Leveraging the foot traffic that they draw in, for example, anchors have historically enjoyed nominal rents that are a fraction of the per-square-footage rate that smaller, in-line tenants pay.
But with the disappearing act that big box and anchor stores have performed in recent years, mostly due to the rise of e-commerce, these rules may be changing. Large, regional malls in particular are searching for ways to scratch out a second life for dormant space in their properties.
Now with the announcement that Bon Ton—owner of a number of store nameplates, including Carson’s in the Chicago area—will close all of its locations by the end of July, many malls suddenly have a new hole to fill. Could this latest retail downfall be enough to destabilize some regional malls?
Morningstar Credit Ratings, LLC recently evaluated mall CMBS loans across the country that may face elevated default risk because of the Bon Ton closing. Here’s a look at six malls in the Chicago metro area, with varying levels of risk.
Chicago Ridge Mall, Chicago Ridge
Positioned at 95th Street and Ridgeland Avenue in the south suburbs, Chicago Ridge Mall has performed well, with a cashflow of about $2 million more in 2017 than at the loan issuance in 2012. The departure of its Carson’s notwithstanding, the mall has historically maintained very strong occupancy.
“I think that even though you’re going to lose a little bit of cashflow in the short term, I don’t see this mall becoming a significant problem,” said Edward Dittmer, senior vice president at Morningstar Credit Ratings.
One of the mall’s strengths is a prior self-transformation that includes the addition of non-traditional mall tenants such as Aldi and Michaels. Many tenants also have exterior entrances, making the property appear more like a retail power center than a regional mall.
“With the mall’s performance, and the transformation that’s already taken place,” Dittmer said, “there may be some ideas that the owner of the property has to do with that Carson’s space to continue that transformation from a plain old regional mall to something that’s more of a community center.”
Lincolnwood Town Center, Lincolnwood
Immediately north of Chicago, the default risk in Lincolnwood could be of concern. Carson’s was paying an estimated rent of about $900,000, and cashflow could approach break-even with the store’s departure. This might force the owner, Washington Prime Group, to take money out of its own pocket to pay the debt service, though it should remain stable in the short term.
The bigger concern is this particular mall’s size. Lincolnwood Town Center has 80 storefronts, but only two anchors—one of which is about to go dark with Carson’s departure. Once that happens, it could create an imbalance in the mall, with a domino effect of in-line tenants looking to move.
“I’ve seen this phenomenon at a lot of other malls,” Dittmer said. “That corner of the mall can start to degrade a little bit as tenants don’t want to be there. They might move to the other side of the mall or they may close their stores when their leases are up.”
Many in-line tenants have a co-tenancy clause in their leases providing them some leverage should two or more anchors close. With only two anchors to start with in this case, the clause could very well be triggered with the Carson’s closure, leading some smaller tenants to seek out reduced rent or to leave the center. But as the loan is not set to mature until 2024, Washington Prime has time to re-tenant that space, assuming they cover the debt service.
Orland Square Mall, Orland Park
The four-anchor Orland Square Mall in the southwest suburbs will also lose its Carson’s. This comes on top of the announcement earlier this year that embattled retailer Sears would be closing its Orland location. Seritage, the REIT that spun off from Sears in 2015, already has plans in place to develop an AMC movie theater in a portion of the space, however, so the situation isn’t quite so dire.
The new theater will occupy the 90,580-square-foot upper level of the Sears footprint. Seritage hasn’t announced a tenant for the lower level, which could be used for retail or reconfigured for another non-traditional tenant. With these plans in place so quickly, the Carson’s closure on its own shouldn’t be enough to trigger co-tenancy clauses with other tenants.
“The mall seems like it’s doing okay,” Dittmer said. “The fact that you’re getting that movie theater in there relatively quickly, to me at least is an indication that retailers like the mall, or they at least perceive that the demand is going to be there.”
Stratford Square, Bloomingdale
The portion of Stratford Square that currently houses the Carson’s is owned by Bon Ton, not the owner of the mall, which in this case is Northbrook-based StreetMac. Anchors owning their portions of mall real estate is rather common. They often own the land and the box containing their store; or if the mall owner holds the deed on the land, they may lease that from the owner and build their store on top.
This real estate control is what allowed Seritage to spin off from Sears in its sale-leaseback scheme. For Stratford Square, it should reduce StreetMac’s risk. What is a cause for concern is that the mall has already suffered the loss of a JCPenny store which closed in 2014.
Bloomingdale collects a one percent sales tax specific to the mall intended to help defray the cost of any development at Stratford Square. In place until 2030, the tax is capped at a $20 million payout. To date, the city has paid out a little over $11 million. StreetMac requested a cap increase to $35 million, out of which they could pull some funds to offset the nearly $50 million in redevelopment cost that they’ve announced for the mall.
“As far as I know, there hasn’t been any significant work started at that mall, but losing the Bon Ton now complicates that redevelopment a little bit more, because now you have another space that you have to worry about,” Dittmer said. “The requested cap increase may indicate StreetMac’s feeling that they may need to invest more than originally projected.”
Woodfield Mall, Schaumburg
With 300 stores and 2.7 million square feet of retail space, Schaumburg’s Woodfield Mall is the largest mall in the state and one of the largest in the country. Simon, the mall’s owner, announced their commitment to the property in 2015 with major capital improvements. The latest phase of this redevelopment is a $20 million, 820-seat dining pavilion that just opened.
“Woodfield is the dominant mall in the Chicago area. That’s probably the mall that retailers are going to want to get into if they are going to try and break into the Chicagoland area,” Dittmer said. “For me, losing the Carson’s there doesn’t seem like a significant event.”
Yorktown Center, Lombard
Lombard’s Yorktown Center does not have a typical ten-year, fixed-rate loan, but a floating-rate loan that was securitized in 2014. After receiving that loan, the mall actually performed well; cashflow in 2015 was about $16.3 million, up from the $15.8 million that the loan was underwritten at. Unfortunately, Sports Authority left the mall the following year and by 2017 the cashflow was at $13.6 million, more than $2 million below original projections.
“A lot of lenders have shied away from regional malls in general. It’s just out of favor with CMBS lenders,” said Dittmer. “With their cashflow down, I suspect that the borrowers may not get enough loan proceeds to take out their existing loan.”
The borrowers in this case are KKR and Pacific Coast Capital Partners. If they seek to refinance the loan, they may not get approval at a standard bank or CMBS loan provider. Additional funds would have to come from an alternative lending source that’s willing to go a little bit higher on leverage or buy into a redevelopment story. The question remains, if they chase their initial investment with more money, will they see a return on those funds?
