Simon investing heavily in upgrading, transforming mall properties

The scene at the East Coast’s largest mall on a recent Friday morning would seem to fly in the face of the doomsday narrative surrounding U.S. retail centers. A steady stream of holiday shoppers walked the lacquered halls, browsing stores from Gap to Gucci. By noon, a line was snaking out of an outpost of the Shake Shack burger chain.

In the background, changes are afoot to ensure the crowds keep coming.

King of Prussia Mall, a 2.8 million-square-foot shopping wonderland northwest of Philadelphia, is the type of destination center that mall defenders say can defy the rise of online shopping. It’s a sprawling complex that houses stores from all corners of the retail universe, more than 50 food venues and a concierge lounge. Yet it still has to grapple with today’s reality, such as a J.C. Penney that shut down in July and left a hole in a key anchor spot.

Indianapolis-based owner Simon Property Group Inc., the largest U.S. mall landlord, sees the closure as an opportunity to bet on non-retail uses.

For the first time since Woolworth’s and E.J. Korvette opened their doors more than 50 years ago, a sizable chunk of land at King of Prussia will be dedicated to something other than stores and restaurants. Simon is planning a mixed-used development for the 17-acre site of the J.C. Penney and its parking lot, part of an eventual transformation that CEO David Simon has likened to a suburban version of Hudson Yards, the massive complex of offices, shops and residences on Manhattan’s western edge.

“I don’t think people appreciate how dynamic these properties are and how they evolve over a long period of time,” Rick Sokolov, Simon’s president and chief operating officer, said in an interview at King of Prussia.

It’s a sign of the times that even King of Prussia—which ranks in the top 3 percent of malls in the country, according to Green Street Advisors—is turning what was once retail space into other uses. With the rise of e-commerce imposing a rapid reckoning on retailers and their landlords, mall owners are turning to everything from restaurants and bowling alleys to apartment buildings and hotels to internet-proof their properties.

Retail landlords have spent $8 billion in the past three years on updates that focus on experiences that can’t be found online, according to brokerage Jones Lang LaSalle Inc.

King of Prussia already is a destination unto itself. The complex sits at the crossroads of four major highways about 20 miles outside Philadelphia. It serves local well-heeled shoppers from the Main Line yet also attracts visitors from northern Maryland to southern New Jersey, Sokolov said. It’s the second-largest mall in the U.S. behind the Mall of America in Bloomington, Minnesota, according to the Directory of Major Malls, though Sokolov said King of Prussia has more pure retail space.

“King of Prussia fits in a unique bucket,” said DJ Busch, an analyst at Green Street. “Every retailer under the sun is at King of Prussia. It’s a catchall, and that has a lot of value.”

Sokolov declined to divulge details of the proposed plan for the mall. On a conference call with analysts in October, CEO Simon said the project could include a hotel, apartments and office space, and had the potential to increase the property’s value from $2 billion to more than $3 billion.

“We’re very excited about the opportunities to implement and add mixed-use components to King of Prussia,” Sokolov said. “We are working with Upper Merion township to come up with an acceptable scope of redevelopment.”

Developers are increasingly turning to mixed-use developments to fortify their retail holdings, sometimes building on the underlying stores to create a downtown atmosphere. In Atlanta, Simon is embarking on an overhaul of Phipps Plaza in the upscale Buckhead district. It will have the city’s first Nobu hotel, including a restaurant featuring its signature high-end Japanese dining.

It’s not easy to pull off a large-scale mixed-use project, according to Green Street’s Busch. It can be hard to meld different property types, and it’s not likely to work if a landlord is trying to save retail that is already failing, he said. And it costs money. Lower-tier malls and cash-strapped owners won’t be able to keep up.

Simon, with a market value of almost $53 billion, is better positioned than many of its peers to weather the turbulence. The Indianapolis-based company is spending $1 billion annually to upgrade its properties, and plans on doing so for the next several years, according to Sokolov. He rejects the idea that the redevelopments are a defensive response to the unrelenting growth of the online marketplace.

“A defensive position to me is if you have no choice, and if you don’t spend the money, your property will no longer be relevant,” Sokolov said. “We’re spending money to make our properties incrementally more relevant and more attractive to retailers, and generating returns while we do it. I think that’s very different.”

Even the most successful properties aren’t immune to the forces reshaping the retail landscape, according to Haendel St. Juste, an analyst at Mizuho Securities USA LLC. Landlords can’t afford to sit on their hands and wait.

“It’s probably fair to assume that they wouldn’t be doing this unless they had to,” St. Juste said. “You have to reach beyond your group of historical tenants to figure out the highest and best use of your portfolio in a world where there is too much retail.”

It seems unlikely that King of Prussia, where finding a parking spot on a busy holiday weekend is a common complaint, is in danger of spiraling into obsolescence anytime soon. The center has been a work in progress since it opened in 1963, and almost half of the stores have turned over just in the past decade, Sokolov said. The way he describes tenant turnover is akin to the process of natural selection, leaving the strongest retailers standing.

“Every day every one of our properties is either getting better or getting worse,” Sokolov said. “We are totally focused on making sure they get better.”

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