Cheap Deal Casts A Pall Over Malls

Image source: Kiev.Victor /

What's going on?

Property manager Brookfield Property Partners reached a deal on Tuesday to buy out GGP Inc., the second-largest mall owner in the United States – but the relatively low price it paid shows just how topsy-turvy the world of commercial real estate is these days…

What does this mean?

The rise of ecommerce has hit many traditional retailers hard, even driving a few (like Toys R Us) to bankruptcy. And that’s been pretty bad news for their landlords, who rely on rents from commercial properties to stay in business!

But as store closures accelerate, some property managers are cannily snapping up commercial real estate in desirable urban areas on the cheap and repurposing all that shop floor as apartments, hotels or office spaces. That’s what Brookfield did with many of the locations it acquired from Rouse Properties in 2016 – and what it plans to do now with many of GGP’s malls.

Why should I care?

For markets: GGP’s cheap price tag suggests a bleak outlook for the mall sector.

Investors appear to have expected GGP to command a higher price, especially given its supposedly strong portfolio of high-end mall properties with chi-chi tenants like Tesla and Tiffany’s. Shares of other American mall owners like Simon Property Group and Macerich both fell around 3% on Tuesday.

The bigger picture: Commercial real estate companies haven’t performed too well this year.

Shares of real estate companies often feel the heat as interest rates go up (as is currently happening). That’s because the fixed income generated by these companies (i.e. the rents they charge) becomes worth relatively less in the eyes of investors as the returns on offer from other investments start to go up. Of course, that isn’t a problem if those companies can increase the rents they charge – but in a world where stores are struggling, that just isn’t feasible for many firms.

Originally posted as part of the Finimize daily email.

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