Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
Simon Property Group is the biggest mall owner in the US. They’ve already bought two struggling retailers and now they’re considering buying J.C. Penney. But why?
“We make these investments for the sole purpose of ‘we think there’s a return on investment’,” said Simon Property’s chief executive officer, David Simon on a February earnings call.
Some analysts think differently. They think they’re doing this to keep the retailer alive, so that Wall Street doesn’t see the trend of declining income. Some think their business model has been cracked for a long time.
One thing is for sure…if Simon rescues another big tenant, a move that could help stabilize its mall business, it will raise new questions about the industry’s longer-term viability.
Simon is teaming up with Brookfield Property Partners, another large owner of shopping centers, in exploring a bid for J.C. Penney. The department-store chain filed for bankruptcy in May.
J.C. Penney is one of Simon’s top anchor tenants, second only to Macy’s. Simon had 63 J.C. Penney stores as of the end of the first quarter, covering 10.2 million SF and 6% of its space in U.S. properties. Brookfield has 99 J.C. Penney stores.
If the two sides reach a deal, it would be Simon’s third tenant acquisition and its third partnering with Brookfield. The two property owners, in a consortium, purchased apparel retailers Forever 21 Inc. and Aéropostale.
A challenging landscape
While Simon Property said the investment in Aéropostale became profitable, analysts said the trend of buying distressed tenants to maintain occupancy isn’t sustainable and is a worrying sign that property owners’ rent-collection business model is under siege.
Changing shopping habits, the growth of e-commerce, and now social distancing during the pandemic have crippled many retailers. It is still unclear how many shoppers will return to bricks-and-mortar stores, but retailers have said they have been compelled to shore up their online shopping platforms and to consider closing stores.
Landlords have seen rent collections drop during the second quarter as shoppers stayed away because of local lockdown orders.
Simon and other property owners are also under immense pressure to keep vacancy rates from rising.
Some investors have noted that at a low-enough price, Simon and other investors can profit from buying distressed retailers and keeping those stores open.
Simon and its partners paid $81 million for Forever 21’s e-commerce site and retail units, which typically had stores exceeding 10,000 SF. That is larger than other specialty stores, making them harder to replace and giving Simon a bigger incentive to keep them around.
After the Simon group took control, Forever 21 has continued to operate its e-commerce operations and kept hundreds of stores from closing.
As recently as last year’s third quarter, Simon had 98 Forever 21 stores totaling 1.5 million square feet, making it one of Simon’s top 10 tenants…though the retailer has since fallen out of that list.
The purchase of J.C. Penney would also give the landlords more control over the shopping center’s space. If another firm takes over Penney, that firm would also get control of certain property rights at the mall. That could make it difficult for landlords to do things like changing the parking structures or exits.
The closing of a J.C. Penney or any other anchor department store is a major risk for a landlord, given the difficulty of finding a replacement tenant in the current economic environment. Gyms, entertainment operators and co-working companies that have taken up spaces in malls are now struggling to stay afloat, let alone expand.
For malls that have already lost an anchor tenant, losing another one could trigger cotenancy clauses. These clauses allow smaller tenants in the mall to pay a reduced rent if, for example, two anchor tenants close their stores.
If these spaces aren’t occupied within a set period, say 18 months, other tenants may also be allowed to terminate their lease without penalty.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com