Turning Obsolete Malls and Offices Into Housing
My recent commentary on office to apartment conversions (in the Q4 2023 update for Mid-America Apartment Communities) may seem far fetched to a few readers.
I want to share some historical context.
The Future of Malls
In May 2017, I wrote about “The Future of Malls”.
In the article, I criticized management of mall REITs for not going far enough.
Management’s view from May 2017:
Mall owners should change the services the mall offers to revitalize malls.
Note: Many of these executives have since either retired or gone through the bankruptcy proceedings for the portfolio of malls they managed (poorly).
My view from May 2017:
Mall owners should set aside entire sections of the mall to convert to small housing units such as micro-lofts.
Replace poorly performing anchor stores with tall apartment developments to create an extremely walkable environment.
Poorly performing anchor tenants (hey, JCPenney, how you doin?) could be replaced with skyscraper apartment buildings.
When do you drive to the mall for dinner? Almost never. Yet they have entire food courts.
Would you be willing to walk the distance from an anchor to the food court? If they had better restaurants? Probably, but you have no reason to be in the anchor. Many anchor stores simply don’t generate the traffic they were supposed to.
Consequently, high rise apartments create a more reliable stream of customers. Could someone rent an apartment without ever using the mall? Sure, but why would they? Those apartments can command a premium because of the walkable environment. During a blizzard, people could still access the food courts, gym, and other facilities.
Investing Results
I need to quickly address the elephant in the room. During this time, we did some trading in mall REITs. Overall, we generated a small net profit across our trades. However, management didn’t embrace our ideas and we soured on the sector. We decided that many would ultimately fail due to factors such as excessive debt, declining occupancy, and lack of vision. Many of the mall owners eventually slid into bankruptcy. While it was disappointing to only have a small net profit (far below our normal results), most of the companies in the sector delivered returns around negative 70% to negative 99%. In that context, positive returns was quite an achievement. You can decide for yourself whether to focus on the outperformance vs. the property type or the relatively small net profits.
Skepticism On Conversions
The idea was met with quite a bit of skepticism from some individuals.
Did it play out as we projected?
Yes and no.
There have been a ton of mall to apartment conversions, exactly as predicted.
On the other hand, several mall owners and / or city councils were too stupid to get a deal done. In other cases, it may have been existing anchor tenants blocking deals because they were given far too many rights within their leases. Those anchor tenants could still benefit from the conversion, but some may seek to extract as much value as possible by blocking the redevelopment unless they were given additional incentives.
In those cases, many malls simply became a source of blight on the city.
Getting Hyped
One of the conversions happened in Milwaukee. The media generally didn’t care, until one random person (not a famous “influencer”) walked through and posted a video to TikTok.
TikTok is like Youtube, but with a site that doesn’t work as well and crappy video resolution.
That mediocre pixel count scored millions of views by showing people that mall-to-apartment conversions could be great.
Indoor tennis courts? Looks lovely.
Thanks to that one individual for recognizing something many mall REIT executives (paid millions per year) couldn’t figure out. A mall could be a great place to live.
That development is called the Plankinton Clover. Besides tennis courts, it even has an indoor pet area and a 3,500 square foot gym.
What does it look like on the outside?
Here’s the google Street view for the address:
Virtual tours are available on the website. Some units may have a dreadful view. Regardless, this is one of many conversions that created a much better use for the property.