​Nation's Biggest Mall Landlord Steps Up Efforts To Diversify, Transform Its Retail Centers

Simon Property Group, the nation's largest mall owner, expects to spend roughly $1.5 billion building 2,000 multifamily units and hotel rooms as it looks to add density and expand some of its retail properties in new ways.
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The Indianapolis-based landlord estimated it will have construction of the projects completed over a five-year span, CEO David Simon said Tuesday on a first-quarter earnings call. He discussed the real estate investment trust's pipeline of apartments and hospitality properties while pointing to what he described as the company's successful redevelopment of Phipps Plaza in Atlanta, a mall that now has a Nobu hotel and restaurant and Life Time fitness center on its site.

Mall owners around the nation have been diversifying and adding density to their centers, bringing in nontraditional retail uses to help drive foot traffic and to take the place of vacant anchor tenant space and unused surface parking lots. And now Simon Property is stepping up its efforts on that front.

“We have several densification projects under construction and a pipeline of identified projects," David Simon, who is also the company's chairman and president, told Wall Street analysts.

"Now that’s not going to happen overnight, but that’s going to happen over the next few years," he said. "So that to us is a real opportunity.”

Simon Property expects to start work on several of these projects this year, but the CEO said the REIT is "frankly being a little bit cautious."

Simon said, "We’re still permitting some things in California and the Northwest. So we’re going to just see how the world is."

Plans for Texas, California and Florida​

Asked about the cost of the multifamily units and hotel rooms, Simon said it is hard to isolate them from overall mall redevelopment efforts.

"But my instinct would be probably about a billion and a half dollars. ... Somewhere in that range" for the construction, he said.

The CEO didn't offer too many details. But he said some of the residential units are planned for Austin, Texas; Orange County, California; and Seattle. In terms of hotels, they will be headed for Florida, as will some residential units, according to Simon. 

“It’s kind of where you would expect it to be, where supply and demand is in our favor,” he said.
The REIT is also considering building a hotel on Cape Cod, Massachusetts, because there would be a demand for it there, according to Simon. 

The CEO didn't specify which malls, if any, the 2,000 units would be built and added to. But Simon did refer to the reimagining of Phipps Plaza in the Buckhead section of Atlanta.

"As we give back real estate through our redevelopment efforts, the big focus is on where we can add some mixed uses, because we do think that what we did in Buckhead is having a tremendous impact on the overall value of that real estate,” Simon said.

Possible Joint Ventures

There are several ways the company could finance the construction, according to the CEO.

“I think we will do selective [joint ventures] on certain of the residential development," Simon said. "And it also may be that we could potentially bring in third-party equity, too. We’ll look at each deal individually. But that’s certainly a possibility.”

Last October, Simon Property acquired a 50% stake in developer Jamestown as it looks to expand and wring new revenue from its portfolio by diversifying its shopping centers. Jamestown has been involved in landmark projects such as Chelsea Market in New York City.

The CEO also said leasing demand is strong at Simon Property's malls and that the properties are getting a boost because tourism is coming back.

Hines, the global real estate investment, development and property manager, released its global outlook titled, “2023: Navigating Through the Labyrinth” today. Following the turbulence in 2022, opportunities will abound this year due to repricing, continued outperformance of high-quality office assets, and deflation in some key sectors.

Global Chief Investment Officer David Steinbach said, “In a period of global economic discord, transaction volume will be unlocked with debt availability and the reset of pricing levels more in line with expected fundamentals. Successful acquisitions and developments in the new year will also focus on high quality assets that meet customer demands for simplicity and flexibility. We expect to see more accretive opportunities emerge in 2023.”

Looking at global trends, the report reveals that mostly industrial and for-rent residential markets continued to have solid fundamentals. Retail fundamentals saw recovery from the damage caused by lockdowns, but high inflation in many markets is cutting into discretionary spending and is disrupting continued recovery. While short-term rates are expected to fall and long-term rates to remain sticky, the report outlines a few key areas as signs for investors to pivot strategies, including improvement in transaction volume, rising availability of traditional debt, and cost-averaging down (i.e., deploying capital patiently during a market disruption). 

Sectors in Our Sights

Utilizing proprietary research tools to analyze market data, the report provides sector insights for the Americas, Asia, and Europe and suggests how real estate investment strategies should evolve this year:

Americas

Investors are still recalibrating their portfolios, as they have seen downturns on both the equity and fixed-income sides of their ledgers. Tenants have been reviewing their growth plans for the year ahead and pausing on new activity, however, there is potential for opportunities during the second half of the year, including: 

• Industrial: Industrial fundamentals are still strong in most markets, but demand will drop if discretionary consumer spending is negatively impacted by the downturn. The most interesting opportunities are in high barrier markets where yield premium to acquisition value is substantial.
• Office: Continued caution is warranted as the full impact of hybrid schedules has not been fully absorbed. Flight to quality will remain evident in new development performance as a better designed, modern, sustainable product.
• Living: Careful submarket selection is paramount, as some markets are oversupplied, and affordability ratios are elevated. Secondary and tertiary markets may provide outsized opportunities arising from migration trends, and there is continued demand for larger units, activated green spaces, and single-family rentals. 
• Retail: Compelling opportunities are emerging to redevelop dated retail for the highest and best use, such as grocery-anchored, lifestyle and open-air service-oriented retail offerings and last-mile logistics.

Asia

Against the backdrop of this year’s macroeconomic and political headlines, the rebalancing of real estate product types has largely played out. Trends have indicated that the real estate industry’s main sectors may converge further. Opportunities exist in: 

• Industrial: Demand for logistics space remains strong to address e-commerce demand, and as Asia’s economies become wealthier, there is a need for more cold-storage facilities.
• Office: Assets have seen strong growth in high-value locations. While Asia has not been hit as hard by working from home or hybrid schedules, attracting new tenants to office spaces will require a new creative dimension of user experience.
• Living: Rental demand continues to grow in markets where homes have become increasingly unaffordable; this includes developed markets like Australia, Korea and Japan.
• Retail: Yields for retail assets have been attractive relative to other property sectors. Increased stability in retail fundamentals will continue as vacancies and rents have been stable or moving in the right direction.
• Emerging Sectors: Sectors such as life-sciences are institutionalizing, suggesting higher income yields and growth prospects.

Europe

As we look at strategies for 2023, the ‘beds and sheds revolution’ of recent years has played out. There is no longer a standout winning sector. Our ability to understand nuances of quality within a product type has become more important than just picking the right general bucket. Opportunities will include:

• Industrial: As capital demand normalizes, focus is expected to return to individual assets and location quality.
• Office: The future of the office debate continues with a focus on a flight to quality – with occupiers seeking a path to net zero. This means there is a smaller pool of viable assets, yet a focus on prime buildings given ESG should outperform older assets.
• Living: Mainstream residential is losing its appeal as yields tighten and heightened regulation (e.g., Ireland, Netherlands, Germany) has restricted rental growth. However, niche product types such as senior living, student housing and serviced apartments maintain their appeal.
• Retail: The sector is faring better than expected. Negative sentiment has resulted in attractive pricing; however, new economic headwinds and uncertainty will delay a quick sector rebound as consumer confidence continues to draw back.

Click here to read the report and watch a video from David Steinbach, global chief investment officer at Hines.
 
About Hines

Hines is a global real estate investment, development and property manager. The firm was founded by Gerald D. Hines in 1957 and now operates in 28 countries. We manage a $92.3B¹ portfolio of high-performing assets across residential, logistics, retail, office, and mixed-use strategies. Our local teams serve 634 properties totaling over 225 million square feet globally. We are committed to a net zero carbon target by 2040 without buying offsets. To learn more about Hines, visit www.hines.com and follow @Hines on social media.
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¹Includes both the global Hines organization as well as RIA AUM as of June 30, 2022.