Park Plaza at Risk in Mall Foreclosure Era

Park Plaza at Risk in Mall Foreclosure Era
Park Plaza, at Markham Street and University Avenue in Little Rock, is caught up in the brick-and-mortar sales decline that was evident before the COVID-19 pandemic but has been worsened by it. Park Plaza, like a growing number of malls today, appears to be headed for foreclosure. (Maddalynn Davis)

Even before the coronavirus upended the world, malls were struggling to attract customers.

Now the situation is worse.

U.S. retailers are expected to see between 20,000 and 25,000 store closings in 2020, “representing a significant uplift from our previous estimate of up to 15,000 closures,” according to a June 9 report from Coresight Research of New York. And about 55%-60% of those store closures will be in malls, which could speed the death of malls around the country, the report said.

In Arkansas, several malls are struggling. Park Plaza in midtown Little Rock appears to be headed for foreclosure. The mall’s owner, CBL Properties of Chattanooga, Tennessee, said in a May filing with the Securities & Exchange Commission that it stopped talking with lenders about a potential modification and extension of the loans secured by Park Plaza for $77.6 million and a mall in Illinois for $27.5 million.

“CBL anticipates cooperating with the lenders in foreclosure proceedings,” the filing said.

A spokeswoman for the real estate investment trust that is the largest owner and manager of shopping centers in the Southeast told Arkansas Business last week that the company doesn’t “have any updates to provide at this time.”

Last year, Park Plaza Mall CMBS LLC challenged the Pulaski County Board of Equalization’s $63.6 million appraised value of the three-story mall. Park Plaza said the appraised value should have been $20.8 million, according to its December filing in Pulaski County Circuit Court.

The mall’s attorney, William Elias of Oklahoma City, told Arkansas Business last week that he’s sure the mall’s value hasn’t increased since the first of the year.

The case is pending.

In Pine Bluff, The Pines, which opened in 1985, has been shut down for about a month, one of its owners, Thuytien Vu, told Arkansas Business last week. She said the mall wasn’t getting paid enough in rent from the tenants that were there.

Vu said she couldn’t “handle any more. It stressed me.” J.C. Penney Co. closed its doors at the mall in 2019. The Dillard’s Clearance Center remains, but Dillard’s Inc. of Little Rock owns its space at the mall. A Dillard’s spokeswoman said the Little Rock retailer has not announced any plans to close the Pine Bluff location.

The Saracen Cinema 8 at The Pines also is currently closed, but it sued the mall owners in May for breach of contract over conditions at the theater, which it said the owner should have maintained.

Saracen Cinema said in its lawsuit, filed in Jefferson County Circuit Court in May, that it paid nearly $20,000 in November to repair the heating and air-conditioning systems and fire alarms and remove mold and pests.

The case is pending.

At the Hot Springs Mall in Garland County, store vacancies have increased. In January 2018, 22 of 60 storefronts were vacant, and the mall had all three of its anchors: Dillard’s, J.C. Penney and Sears. Now the mall has 34 vacant storefronts and only two anchors; Sears left last year.

The appraised value of the mall has fallen since 2015, when it was appraised for $11 million, according to the Garland County Assessor’s office. In 2019, it was appraised for $8.2 million.

The mall’s manager didn’t return a call for comment.

Moving Online

During the last several years, shoppers drifted away from brick-and-mortar retailers to online retailers, such as Amazon. The brick-and-mortar retailers felt the shift as they saw their foot traffic decline.

At Park Plaza, the retailers, excluding Dillard’s, had sales of $330.30 per SF in 2017, according to a report by Dinan Real Estate Advisors Inc. of St. Louis, which was filed as part of an exhibit in the mall’s valuation appeal. In 2018, sales fell to $318.72 per SF. Sales were also expected to decline in 2019 and 2020, the report said.

The situation worsened for brick-and-mortar retailers in 2019. Major U.S. retailers announced nearly 10,000 store closures, which was a record at the time, and just about 4,700 store openings last year, according to Coresight Research. And in the first half of 2019, 10 major retailers filed for bankruptcy protection.

Other cracks in the business model governing malls have appeared in the last couple of years, said Peter Korpacz of Korpacz Realty Advisors Inc. of Mount Airy, Maryland, which values shopping centers. “At some point we recognized too many malls have been built,” he said.

There were about 1,200 enclosed malls in 2017, and about 350 of those aren’t needed Korpacz said. “It appears that we just have too much,” Korpacz said. “And we have too much particularly in apparel, and [that] has become painfully obvious recently.”

“According to real estate analytics firm CoStar, department stores and apparel chains, which are among the most vulnerable sectors, represent 14 of the top 20 occupants of U.S. mall space,” Coresight Research said. “The high dependence of malls on these two retail formats has ominous implications.”

The Pandemic

Starting in mid-March, COVID-19 concerns and stay-at-home orders kept shoppers out of malls for weeks.

Coresight Research said the temporary closure of nonessential stores “looks to have accelerated the shift to e-commerce.” And some retailers weren’t ready. Through the first half of this year, 17 major retailers filed for bankruptcy protection, and more are projected in the second half of the year.

“We expect to see a spate of bankruptcies this year, as the debilitating impact of the coronavirus on sales will likely quell hopes of survival for a number of struggling retailers — especially debt-laden retailers,” Coresight Research said.

And retailers might go straight to Chapter 7 liquidation rather than try to restructure their debt, the research firm said.

More store closings would cause more problems for mall owners. Most mall tenant leases include a clause that says as long as the mall anchor is open, the retailer will pay an agreed upon rent, said Edward Dinan, president and owner of Dinan Real Estate Advisors. But when the anchor leaves, the store will pay a percentage of the agreed upon rent, he said.

Investors in malls also watch when a tenant’s lease expires. The mall “may be 70% occupied today, but there’s a good chance that next year it’s going to be 50% occupied or 40% occupied,” Dinan said. “And from an investment standpoint, investors are dumping them.”

Collecting rent has also been difficult for mall owners.

CBL Properties said in its SEC filing that a majority of its tenants requested rent relief, either by delaying payments or reducing them. “We have placed a number of tenants in default for non-payment of rent,” it said in the filing. For April, CBL received about 27% of billed rents. It estimated that May’s rent collection would be in the same range. CBL estimated that it would receive most of the rent later this year or early next year, the filing said.

Change or Die

“So the real question now is, where do we go from here?” said Korpacz, who values malls.

Malls will have to evolve to survive, he said. The COVID-19 pandemic will continue to take away more business from retailers because people are afraid to go to stores and be in large crowds, he said.

Restaurants, however, might be attracted to the larger spaces in malls for social distancing purposes, “which I think is going to continue to evolve on some basis,” Korpacz said.

He said there still will be malls, just not 1,000 of them. “That’s all going to shake out over time,” Korpacz said.