Fifth-largest mall landlord in the US gives up on shopping centres

Los Angeles

STARWOOD Capital Group owned 30 malls before the Covid-19 pandemic. It is now down to eight. As values for retail properties plunge, Barry Sternlicht's investment firm has been selling shopping centres across the US at money-losing prices. Its remaining malls are being managed by outside companies that potentially will seek new owners. In essence, Starwood has decided it is time to stop pouring good money after bad.

"With further deterioration caused by Covid, committing substantially more capital required to successfully reposition many of our assets became unviable at our existing cost basis," Mark Deason, a Starwood managing director, said in an e-mail.

The dispositions - among the biggest US commercial-property liquidations since the pandemic hammered the economy last year - mark the end of a nearly decade-long bet that made Starwood the country's fifth-largest mall landlord. Owners of gallerias and shopping centres across America are confronting a similar dilemma as they triage their ailing real estate, often finding themselves holding properties worth less than their debt.

By unloading its retail properties, which make up about 5 per cent of its investments, Miami-based Starwood can shed more than US$2 billion in debt obligations from commercial mortgage-backed securities (CMBS).

Indoor shopping centres, already battered by competition from big-box stores and e-commerce, plunged even further in value last year as lockdowns kept people away and major chains from Neiman Marcus Group to JC Penney filed for bankruptcy. A price index of US malls has dropped 18 per cent from pre-Covid levels and 46 per cent from a February 2017 peak, said Green Street, a commercial real-estate information service.

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Mall landlords Washington Prime Group, CBL & Associates Properties and Pennsylvania Real Estate Investment Trust have filed for bankruptcy. Even the financially strongest mall owners - Simon Property Group and Brookfield Asset Management - have walked away from shopping centres with dim prospects.

"The very best-quality malls will continue to survive and thrive," said Kevin White, head of real-estate research for DWS Group, an asset manager with US$100 billion in real estate globally. "But that's probably 20-25 per cent of the mall universe. All of the rest will have to be reconditioned into some other use."

Most of Mr Sternlicht's malls were secondary properties in secondary markets, making them vulnerable to falling prices because such locations tend to have weaker sales or be in less-populated areas. The 85 top-rated US malls account for half of the value of the 1,000-plus US enclosed shopping centres, Green Street estimates.

Mr Sternlicht, 60, founded Starwood in 1991 as a distressed real-estate specialist. The firm, with about US$80 billion in assets, has aggressively switched strategies over the years in response to changing markets - selling hotels, buying single-family rental homes, starting a

property-finance unit, and acquiring LNR, a company that works out troubled commercial real estate.

Starwood began assembling a portfolio of malls and shopping centres in 2012 as the commercial real-estate market recovered from the financial crisis. It paid US$3.2 billion for 19 properties within 18 months, expanding to 30 malls by 2017.

Last year, the website described Starwood Retail Partners as "not your father's - or grandfather's - landlord. Now the fifth-largest manager of regional malls in the United States, we acquire malls and lifestyle centres that dominate their markets, and invest our creativity and funds to reinvent the retail experience for a new generation". Even as it sells, Starwood still is willing to invest in retail property at the right price, Mr Deason said.

"We continue to believe that there is a place for physical retail, but there will be a meaningful shift in which tenants survive and what rents they can pay, causing valuations and capital flows to be volatile for a period of time," he said in the statement.

The company's recent deals have included the May sale of the Blue Back Square shopping centre in West Hartford, Connecticut, for US$40.5 million, down more than 60 per cent from its purchase price eight years ago. Last month, it sold the Belmar in Lakewood, Colorado, for US$113 million to Bridge33 Capital and Waterfall Asset Management. Starwood acquired the mall portion of the project for about US$200 million in 2015. The lower acquisition cost will enable the new investors to make the property profitable, said Julio Siberio, head of acquisitions for Bridge33.

"There's a supply-demand imbalance," he said. "We believe we are buying assets at the right basis due to those dynamics."

Those opportunities may multiply. Regional mall loans account for almost three times more delinquencies than their share of commercial mortgage-backed securities (CMBS), Moody's Investors Service reported on June 30. CMBS debt is non-recourse, meaning a borrower can default without the risk of lenders coming after other assets. Last year, Starwood abandoned a portfolio of five malls with US$549 million in CMBS debt, ceding control to owners of junior bonds sold in Israel. The properties were appraised in August at US$557 million, down 55 per cent in the two years since the debt originated. BLOOMBERG