Requiem for Santa Monica Place

 In 2010 I wrote about my history with Santa Monica Place and Macerich's $265 million renovation which opened an hitherto enclosed fortress mall. (See: Shulmaven: My History with Santa Monica Place )  As of 2010 Macerich had invested a total of $400 million in the asset and much more since then. A few weeks ago Macerich turned in the keys to the lender thereby walking away from a $300 million mortgage. What makes this credit event critical is that this mall was once anchored by toney Bloomingdale's, while  Nordstrom still hangs on and the real estate advisory service Green Street rated the mall A+. Santa Monica Place was not in the category of the B and C malls in second tier cities that have been foreclosed upon in recent years. Indeed Santa Monica is among the priciest real estate markets in the country.

Then, why did the mall fail. Santa Monica Place could not keep pace with the mega-mall in Century City and it faced new competition form Rick Caruso's luxury development in nearby Pacific :Palisades. The mall was plagued by it congenital under-parking and the confusing nature of the city-owned parking structures. However, the most important reason for its financial demise was crime and the perception of crime in the area. All of this was dramatized during the civil disturbances associated with the murder of George Floyd in 2020 at the adjacent open air Santa Monica Promenade. To add an exclamation point to what happened at Santa Monica Place, Federal Realty, a highly regarded operator of street retail and community shopping centers exited from the Promenade by selling all of its remaining holdings  for $103 million.

The lessons here are straight forward. Retail real estate requires constant investment and the surrounding environment has to welcoming and safe. Absent that, even what can be characterized as A+ can fail.

Mall Valuation Post Unibail-Rodamco/Westfield

Earlier this week France based Unibail-Rodamco announced the acquisition of Australian based Westfield, a major owner of A+ malls in the U.S. and Europe for a total valuation of $24 billion. There was a significant difference of opinion on the transaction between The Wall Street Journal and The New York Times today. The Times headline read "Acquisition Signals Hope For the Future of U.S. Malls," while The Journal headline read "Big Name in Malls Heads for the Exits." We side with The Journal.

This is our fourth blog on mall valuation this year and readers familiar with our view know that the Class A mall business is in transition from being a great business to a good business which implies higher cap rates going forward. According to sources we believe to be reliable,  the U.S. assets were valued at a cap rate in the high 4% range, say approximately 4.7%-4.9%. In our view the seller received more than a full price and we might just get a hint of that tomorrow when November retail sales are reported. It is our guess that although traditional retail did well, online retail had a blowout month.

We believe that Westfield's founding Lowy family came to the realization that their huge investments in redevelopment (e.g. Century City) and technology might not payoff and that future investments in redevelopment would be of a defensive nature. Hence it was hard to turn down an offer that approximated Street net asset value.

Nevertheless the stock market responding by boosting the share prices of Simon Property Group, Macerich and GGP. We would view rally as a selling opportunity if only because one of the potential bidders (Unibail) will likely be out of the market for the next two years.