Can You Profit by Breathing New Life into Dying Malls?

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What’s your favorite mall memory? Was it pictures with Santa? Shopping with Cinnabon goo stuck to your fingers? Making a wish with your penny in the fountain? 

Was it going on your first unchaperoned date at the food court? Or hoping not to make eye contact with anyone as you ventured into Hot Topic?

If you grew up in America, you certainly have mall memories. Sadly, American malls may soon be a memory if current trends continue.  

We all know the story. Retail stores were going under at a swift pace as online shopping overtook America in the past two decades. Then the pandemic put this trend into hyperdrive in 2020, and the carnage continues. There is even a website dedicated to dead malls. 

Though it doesn’t erase the nostalgic pain, I’m trying to figure out how to profit from this sad situation. (Call me a capitalist and I won’t deny it. The alternative of a cavernous vacant building housing vermin, providing no jobs, and generating zero tax revenue is vastly inferior.)

Commercial real estate values are based on net income and cap rate (expected rate of return). Both income and cap rates are moving in the wrong direction for malls, and the result is an average value decrease of 45% on A-rated malls since 2016. (I’m actually surprised it’s not worse, but when contrasted with appreciation in other commercial asset values, often in the range of 50% over those five years, the situation really is quite depressing for mall investors.) 

There are reportedly about one thousand malls in America. Experts predict at least a quarter of them will go belly-up in the next several years. 

How can investors, maybe you, be part of the solution? 

Enough bad news. There are a number of ways malls can be repurposed. And repositioning struggling assets can lead to huge benefits for those willing to think outside the box, so to speak. Think about dead factories converted to cool apartments, or dated filling stations turned into hipster restaurants, or mountain caves used for moonshine storage. Wait… 

So, let’s think outside the box together and see if we can get our creative juices flowing. What are some ways malls have already been repurposed for profitable enterprises? 

Corporate headquarters or office space 

Ever heard of Fortnite? I’m guessing you have if you’ve ever been in the vicinity of a ten-year old boy. Fortnite’s creator, Epic Games, is transforming an abandoned mall in Cary, North Carolina, into its new headquarters. 

Is this a good use for other malls? My first commercial investment was in a high-end Colorado shared office space called The Office Club in 1999. I can imagine a shared office provider buying or renting space in a mall for this type of use. 

Self-storage

Brandon Turner and David Greene interviewed A.J. Osborne on the BiggerPockets podcast in July of 2018. A.J. made a massive profit by converting the Reno, Nevada, Super Kmart into a self-storage facility. He created over $13 million in value from a $3 million equity investment while he was in a coma. 

Osborne told me, “Vacant and failing malls offer a unique opportunity for self-storage. They provide a good location and can be converted alongside multifamily. This is a win for communities and investors.” 

Multifamily

The demographics of multifamily are powerful and predictable for decades to come. I even called it the perfect investment in my book on apartments. There is a growing demand for rental housing, and malls could be converted to meet a portion of that need. 

Has this been tested? You bet. America’s oldest mall was converted into apartments in 2015. They’ve been at 100% occupancy since opening and they have a waiting list of 4,000. 

A Bloomberg article explains how apartments could replace anchor stores (like vacated Sears boxes) at newer malls who maintain some of their retail.  

A brilliant friend of mine is trying to convert malls to senior living. He reasoned that many seniors already walk miles inside malls to exercise out of the winter cold and enjoy community. He thinks abandoned stores could be remodeled into living spaces. Anchor stores could be converted to provide convenience items, groceries, and medical care. All under one roof! This is certainly thinking outside the box. 

Data centers

A Baltimore mall is now hosting a data center in one wing. The firm is reportedly so happy that it wants to buy the whole mall. This seems like one of the best uses for a shuttered mall, but it negates the community gathering hub aspect that some other uses offer. 

It would free up parking spaces for conversion to self-storage, outdoor storage, apartments, and more, however. A.J. Osborne sold off most of the Kmart parking lot to apartment developers as part of his profitable Reno self-storage play. 

Charter schools

A public charter school is reportedly utilizing an abandoned mall outfitted for up to 1,000 students. I can imagine other private and public schools in areas benefiting from population migration could do the same.  

Restaurants, hotels, and resorts

A variety of mall owners have plans to convert empty spaces to hospitality venues. Now that COVID-19 has devastated many hotels, I would guess there are better spaces for these opportunities as some of these buildings go back to lenders. 

Medical facilities

This seems like an obvious opportunity. The growing need for medical care for an aging population, as well as the increasing variety of facility types, could make malls the ideal host for these centers. 

And speak of the Devil… 

Jeff Bezos and Amazon are largely and rightly credited with the retail apocalypse unfolding before our eyes. Yet Amazon may ultimately be one of the rescuers of malls and other retail spaces. 

Amazon is in desperate need of more facilities. Their business jump since COVID-19 made this more urgent than ever, as they failed to meet their two-day promises and committed to more local facilities. They are also planning to expand other services like local Whole Foods delivery. 

Amazon is the most likely tenant for potentially hundreds of under-utilized and vacant malls. Amazon has already acquired two Ohio malls to use as fulfillment centers. Many more will likely follow. 

In addition to Amazon, other retailers and manufacturers may utilize malls as logistics facilities. Some may even include a retail component in the same facility. There are already grocery centers that both sell to the public and serve as logistics facilities. 

How can I get in on this? 

Commercial real estate has high barriers to entry. I wondered for years how to get in. Profiting through repurposing malls seems insurmountable for most of us. But it’s not. 

Every path into real estate investing involves teamwork. This is not something to undertake alone, especially if you’re a rookie. Check out these paths and see where you could best fit in. 

Your path will probably involve real estate syndication. This is a powerful way to join forces with other investors and an experienced operator to acquire and operate mid-sized and large commercial projects. You may even want to lead a syndication effort if you have access to a declining mall asset and a desire to turn it around. 

Mall acquisitions will often involve lenders. Some malls have already defaulted on their loans, and experts predict many more will do so. Banks don’t want to be commercial real estate operators, and they may be willing to unload mall assets at a deep discount. If you have a great team and a plan, you may even convince them to provide debt for your venture. 

If you succeed with one project, you may want to form a syndication team to do more. You may elect to move to a fund model to provide diversification across asset types, geographies, strategies, and timing. 

And though I’m not a big REIT fan, if all else fails, you may want to look for a REIT to invest in. I believe you may be able to locate a REIT whose goal is to find and repurpose distressed assets, and this could include malls. 

The next generations’ mall memories may be different—but they don’t have to disappear. There are many potential paths forward for America’s empty spaces.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.