This won’t work for MOA

but it shows how desperate mall owners are to find new uses for vacant anchor stores. Media stories (Business Insider version and CNN version) report Amazon is negotiating with Simon Property Group to use vacant Sears and J.C. Penney anchor stores in malls as fulfillment centers.

The stories suggest it is a good fit for both parties. The idea is that Simon has vacant mall anchor sites and Amazon needs more space for its delivery service closer to the “last mile.” On the surface, it seems reasonable. But, on reflection, it doesn’t make much sense to me (not that I know anything about commercial real estate).

From Amazon’s perspective, mall anchor stores cannot be suited for classic warehouse operations, even if their location is good. The footprints and typical multistory layouts cannot be good for warehouse uses (best would be a 1-story layout big enough to store a good selection of goods and allow efficient picking and assembling of orders) and their access cannot be optimal for easy delivery and pickup (i.e., large loading docks to service the loading, coming, and going of many trucks). Instead, they would be used as intermediate transfer locations (“distribution hubs” according to the stories) that must be stocked from mega-warehouses. How this will work operationally for Amazon is a mystery to me. But I assume it can be made to work (at least for some locations), if improvements to the space are made – translation the rent will need to be low. That (low per square foot rent) is usually the case for anchor stores, because they bring traffic to the mall and allow charging higher rents for smaller stores.

From Simon’s perspective, an Amazon fulfillment center in an anchor location must make the rest of the property in the mall less attractive for retail uses. Rather than bringing potential customers to the site, the comings and goings of Amazon delivery trucks will create congestion and, if anything, drive away customers for other retailers. Maybe it will ultimately convert the whole mall into an Amazon warehouse? After writing this, I noticed this article on Yahoo Finance, quoting the former CEO of Sears Canada, tending to agree that this is a bad sign for malls.

Bottom line: This illustrates how desperate malls’ situation is, especially underperforming ones. Their owners and potential users are groping to find highest and best uses for properties that are obsolete or rapidly becoming so. COVID-19 is accelerating the effects of the online shopping juggernaut. This is just one more anecdote.

The STRIB reported another anecdote on the pandemic’s effects on retail malls: the Burnsville Mall is in foreclosure. That probably means the lenders will take a bath, writing down the mortgage loan, not necessarily that the retail space is going away.

So, what are implications for MOA (my favorite ongoing government subsidy “economic development” saga)? Unclear in my view but its owners must be in a world of hurt. MOA’s business model is a combination of:

• Being the dominant Twin Cities mall – that means attracting a large portion of its business from the residents of the metro and the larger region (rest of Minnesota, Wisconsin, Iowa, etc.) who traditionally do their mall shopping in the Twin Cities. It’s unclear what portion of the business this is, but it must be substantial – 85% at a minimum, I would guess. It is what covers fixed costs and probably most variable costs, as well. It may even be enough to generate a modest profit. The importance of this component is reflected in the drumbeat of MOA advertising in the Twin Cities media market.
• Attracting marginal shoppers who otherwise might shop at malls in Chicago, Denver, or other locations more distant – a “destination shopping” strategy of sorts. Here is where the combination of size and “attractions” (the amusement rides, proposed water park, etc.) come in. They can make the difference in whether a potential shopper decides to go to Chicago or MOA or whether to go on a shopping “trip” at all (shopping as a leisure time activity competing with trips to Disney World, cruises, etc.?). This is what MOA focuses on in talking with policy makers in requesting governmental financial assistance. It argues that purchases made by those shoppers are like a “mercantilist export” good (i.e., they bring in gold from foreigners) that boosts the local and state economies. (Why any local benefit of these sales to Minnesota or the Twin Cities is likely quite modest – less than the MOA’s generous government subsidies – is a story for another day.) I have heard them make extravagant, implausible claims – e.g., that it is 30% to 50% of their business. Higher percentages, of course, help to make a more plausible case for more government dough.

The first component, local/regional dominance, is threatened by the persistent and rapid growth of online sales (the Amazon effect), accelerated by the pandemic which made in-person shopping a health risk. But if other more marginal malls bite the dust, narrowing their competition, that could mitigate the Amazon effect on MOA somewhat. It’s hard to judge but I would expect that MOA is less exposed than your basic mall. But make no mistake, they are being hurt in the short run. Their enormous size could work against them. It prevents them from being nimble and increases the challenge. A strategy that attracts a modest increase in customer traffic (even if enough to save an average mall) probably won’t move MOA’s needle.

But if they can hold on and survive, in the longer run, I could imagine the shake-out of bricks and mortar retail actually helping them slightly. The issue is whether the current MOA owners can make it to the long run. As Kenyes famously said, we’re all dead in the long run. MOA is already in default, having missed multiple mortgage payments and the first half property tax payment. The issue likely will be if its lenders decide that it is in their interest to oust the Ghermezians for a “better” owner – that is likely to be driven by what they think about the destination shopping strategy, among other factors. Whoever owns it, though, is likely to be modestly helped by the death of less competitive malls. Mall shopping is unlikely to go away any time soon.

The destination shopping strategy is more directly affected by the pandemic and the uncertainty it creates for discretionary travel. Even if an effective vaccine is quickly developed and (notwithstanding the anti-vaxxers) widely adopted, it will likely take several years for consumer confidence in travel to recover to 2019 levels. This calls into question the plans for aggressive spending to augment this destination shopping element of the business plan. However, I would expect them to double down because that business model is simply in their DNA. By analogy to the old Geico commercials, if you’re a Ghermezian, building attractions and hotels attached to your malls is what you do. So, we should expect it to continue if they remain as owners and to expect them to ask for government money to help them do so. Public officials, however, should be cautious in deciding to finance those efforts, I would think.

In the short run, they are more likely to be asked by MOA’s owners just to help them survive – i.e., by abating property taxes, making operating loans, or some such. Whether that makes any sense depends upon how important one views retaining them as owners and how that fits in with the mortgage lenders’ views. The property is not going away. The issue is how important retention of the current owners is, if at all. Any rescue plan involving local or state assistance would need to be worked out with the lenders, since any modest government aid cannot be enough (I have to assume) unless the lenders also make concessions. It’s a fine mess.

After I wrote this, the STRIB published this front-page Sunday article about MOA’s struggles. Nothing in it changes my thinking. It discusses the effect of the Ghermezians’ pledging 49% of the property to secure their east coast developments (mainly the big mall in NJ that was just set to open when the pandemic hit). This gives the lenders more leverage and may dampen the Ghermezians’ ability to invest more of their own money in MOA, but I don’t think it changes the basic equation all that much.

This issue will be whether the lenders think the Ghermezians are the only or best operators for the mall(s). This quote from the Stribe article captures it:

Still, despite the uncertainty surrounding malls, the Ghermezians’ properties are at the top echelon — and their lenders will likely not have much choice but to renegotiate, Egelanian said.

“The lenders need the Ghermezians,” he said. “This is like a one-of-a-kind property. Who is going to come in and operate Disneyland other than Disney?”

When it comes to the public subsidy debate (e.g., financing the water park), the NJ and Miami malls the Ghermezians have and are developing will be implicitly competing against MOA for destination shoppers and will dilute MOA’s mercantilist argument for more government money. It makes it clearer that MOA is really a regional attraction – people living in the east or the south and looking for a destination shopping experience will go to the NJ mall, I would assume, or ultimately Miami if that one is built. Both areas are inherently bigger tourist destinations than the Twin Cities – who would go to MOA in the winter, if the alternative was a similar mall in Miami or even the NYC metro area? MOA really should be called the Mall of North Central America.