At first glance, the recently announced Unibail-Radamco Westfield’s (URW)?$538 million sale of Westfield Santa Anita located near Pasadena, CA ?is a solid and positive valuation data point for high quality malls, a sector where investment sales are generally rare. ?With a retail operating environment still recovering from the pandemic, high inflation, and overall real estate values adjusting to higher interest rates, this transaction shows some resilience of the mall sector. Actually, a sub-6% cap rate is better than what mall experts, research firms, and public market valuations likely expected. That’s the good news.
However, taking a closer look at Westfield Santa Anita’s property characteristics, the sale price, and the state of the industrial real estate market ?there is a more interesting conclusion While the Westfield Santa Anita sale is a positive mark for mall values, it is apparent that fast-rising industrial values are exceeding all mall values (including those of the highest quality) by nearly all measures. Going forward, industrial values may serve as a solid floor to mall values. Or said differently, the intrinsic value of Class A malls may be meaningfully underestimated, especially as industrial values continue to rise. A few other issues and ideas for investors to consider:
- The conversion of dying malls and shopping centers across the U.S. into industrial campuses has been ongoing over the past decade as documented by CBRE
as the demand and supply profiles for both sectors have grown in opposite directions over the past decade.?However, Westfield Santa Anita may well represent the first incident where a Class A mall’s property value comes close to math penciling for industrial development.
- This phenomenon has occurred primarily due to the rapid growth in industrial property values.?The recent rise in interest rates has resulted in recent pricing uncertainty, but industrial land values across the U.S. have roughly doubled over the past two years, including in Southern California. Developers and brokers believe land values for properly zoned and entitled sites in Los Angeles should garner at least $8 million per acre ($180 per land sq ft).
- While the Westfield Santa Anita mall itself is nearly 1.5 million square feet with several existing anchors, the mall sits on a relatively rectangular, accessible 80-acre site that could theoretically accommodate a large-scale industrial development.?The sale worked out to a $6.7 million per acre value, which rivals the average price paid for industrial acquisitions this year by two leading Southern California-focused industrial REITs, Rexford Industrial and Terreno Realty.
- There are many factors that can impact a mall’s value, most of which revolve around the ownership and leasehold rights of the anchor tenants (usually department stores) and the property’s overall redevelopment potential. In the case of a property’s potential use conversion, re-entitlement risk is the most important factor and can meaningfully delay a property's conversion, thus greatly reducing its value. A property should also offer reasonable access to transportation nodes for trucks and larger vehicles. In any case, all mall values would benefit from the uplift given the shrinking number of malls in existence.
- It has never been an economic law that retail property values should always exceed industrial values.?The ultimate value of commercial real estate is determined by 1) land use regulations that partially determine supply and replacement cost, and 2) demand, which is partially determined by the underlying economic value created by tenants. While the sales productivity of Westfield Santa Anita ($611/sq ft) is impressive, the underlying tenants selling and distributing goods from fulfillment centers and other industrial properties are significantly more productive on a sales revenue per square foot basis across its warehouse footprint. Over the last several years, industrial tenants have absorbed rapidly rising rents fairly seamlessly. Of course, malls and retail properties can also offer intangible values that are difficult to quantify: as a community meeting space, for tenant brand exposure, or just general experience. Who has not had the time of their life at a Dave & Buster’s (a tenant at Westfield Santa Anita)?
- The ultimate irony of this paradigm shift is that a historical rationale for investing in industrial properties was that the gradual urbanization process would allow the conversion of those properties to a higher and best use over time.?The URW sale reveals that the tables have fully turned 180 degrees...
It is likely that the industrial sector’s fortunes will remain healthy for the foreseeable future. But based on the gradual improvement in bricks and mortar sales and the potential equilibrium in land values, perhaps large-scale retail will now join the property appreciation ride and investors should take a closer look. Friends and colleagues, what are your thoughts?
?Source: Company Press Releases
Disclaimer: These are personal views and do not represent investment advice.
Founder | Palisades Property Trust
2 年Great post Eric Frankel, CFA and David De La Rosa. What Palisades Property Trust is seeing: infill, major market land values still rising while secondary market land values down from peak. The divergence is widening driven by land use policy leaning against undersupplied major market demand. Zoning is paramount especially in light of increasing state and municipal resistance to needed industrial development.
Real estate finance, capital markets, research and analytics
2 年Great note that raises and spurs a lot of thoughts and questions. The other mall site to watch is the former Hilltop Richmond mall in the Bay Area that Prologis bought. In some ways an easier redevelopment given that mall was dead. Even then, it looks like there will be multifamily and other mixed uses planned. On the other hand, Santa Anita is still far from a dead mall so it'd logistically take time and money to clear the rent roll. Then even longer to get the community to realize it's never going back to what it was in its heyday. This is what makes industrial (or even multifamily) in desirable suburban locations so hard to supply. I remember growing up nearby and this was our neighborhood mall. Definitely a shame, as much as I like industrial!