US mall prices seen falling to 2003-04 levels

Source : Business Times – 17 Sep 2009

Biggest US shopping mall owner has US$3.8b, is looking at acquisitions

Prices of US shopping malls may return to 2003 or 2004 levels as consumer spending and the commercial real estate market recover, Simon Property Group Inc chief executive David Simon said. That would represent a decline of as much as 23 per cent.

Simon, the biggest US shopping mall owner, has US$3.8 billion on its balance sheet and is looking at possible acquisitions, Simon said in an interview in New York.

‘There is still a decent bid and ask difference between the buyer and the seller,’ Mr Simon said. ‘I think the sellers’ expectations certainly have gone down from where we were at the end of ‘07, early part of ‘08.’

Prices may go ‘back to the ‘03, ‘04 period of time, somewhere in that range’.

Sales of retail properties in the U.S. fell 71 per cent in the first half of the year, to US$3.6 billion, according to New York-based research company Real Capital Analytics Inc. The announcement by Glimcher Realty Trust this week that it agreed to sell Lloyd Center, a regional mall in Portland, Oregon, for about US$192 million is one indication that buyers and sellers are beginning to come to terms, Mr Simon said.

‘We’re getting closer,’ he said.

Sellers are no longer demanding prices equal to 20 times the cash flow from a mall, Mr Simon said. ‘I think those days are over. Yet are they willing to sell it at 12 times, and are we willing to part with our capital at 12 times? That’s the rub.’

In 2003, 120 regional malls sold in the US, with an average price of US$123 a square foot, according to Real Capital Analytics. In 2004, 119 sold at an average price of US$133 a square foot. This year, only four regional mall sales show up in Real Capital’s database, with an average price of US$159 per square foot.

If prices fall to the 2004 level, it would be a 16 per cent decline, while a drop to the 2003 average would be 23 per cent.

The dearth of sales is in part because companies such as Simon are waiting for prices to fall further, said Peter Slatin, Real Capital’s editorial director.

‘When a buyer of that scale sits on their hands, that’s not going to help prices come up,’ Mr Slatin said. ‘They’re waiting to squeeze the last dollar that they can before they start scooping up assets.’

Simon Property, based in Indianapolis, owns or has stakes in 387 properties with 263 million square feet of space in North America, Europe and Asia. It is both the largest US owner of shopping malls and the largest US real estate investment trust, with a stock-market value of US$19.7 billion. Its malls include Roosevelt Field in Garden City, New York, and Fashion Valley in San Diego.

The company’s shares have dropped 12 per cent in the past year, less than the 27 per cent decline in the Bloomberg Real Estate Investment Trust Index and the 36 per cent drop in the Bloomberg REIT Regional Mall Index.

In the second quarter, Simon Property’s funds from operations fell 8.2 per cent to US$313.1 million, and the company had a net loss of US$20.8 million.

Simon Property raised almost US$1.7 billion from equity sales. The company also sold US$1.75 billion of bonds. It is ‘warehousing’ US$3.8 billion in cash on its balance sheet, Mr Simon said. The company is monitoring the bankruptcy filing of its largest rival, General Growth Properties Inc, and may try to buy properties from the Chicago-based mall owner, he said.

Occupancy at Simon’s regional malls declined to 90.9 per cent from 91.8 per cent a year ago. Sales per square foot at those locations declined to US$442 from US$494. At premium outlet centres, occupancies dropped to 97 per cent from 98.3 per cent and sales per square foot fell to US$493 from US$510.

‘The consumer’s still a little under pressure,’ Mr Simon said, and unemployment will have to decline before retail spending recovers.

‘It’s too early for us to declare the recession over,’ Mr Simon said. At the same time, he said, Christmas sales may surprise even some of his tenants.

‘I actually think it could be a little bit better than what the retailers are anticipating,’ he said.