Mall redevelopment projects face major obstacles in wake of downturn
When Somera Capital Management announced the redevelopment of Laurel Mall in 2007, the Santa Barbara, Calif.-based firm was confident the project would be wrapped up by this year. Then the recession hit. Financing dried up. And the chances of turning the ailing, enclosed mall into a thriving mixed-use town center became slim. The owner has since watched occupancy fall to 15 percent, while waiting for a construction loan to come through.
Somera's plight mirrors that of a number of local retail developers that started projects while the market was flushed with capital only to find themselves stalled once financing evaporated. Some of these players are finding a way out of the financial bind by teaming with private equity partners, but others have been less fortunate.
For Somera, not having the funds to fully renovate Laurel Mall has jeopardized the nearly $16 million in tax increment financing the Laurel City Council ponied up for the project. After months of threatening to revoke the tax break, the council last month granted the developer more time to secure a loan.
"We're seeing movement [among lenders] for projects anchored by major grocery stores, but not as much for the traditional enclosed-mall format," said Jake Farver, a vice president at Somera. Though the company wants to add apartments and some free-standing retail under the $250 million redevelopment, the primary center will remain enclosed.
Walter Coker, executive director at Cushman & Wakefield in the District, said it has been near impossible to secure credit for ground-up or redevelopment retail projects with little to no pre-leasing. "If you have a fully leased retail center and you've got maturing debt coming up, there is money out there to refinance the asset," he said. "Construction loans are back, but they are very sponsorship focused."
Developer Miller & Smith of McLean was able to resuscitate its mixed-use project, One Loudoun, after entering into a joint venture with Japanese builder Sekisui House in October. A month prior, the Ashburn project went through a foreclosure auction, where it was snapped up by the joint venture for $35 million -- roughly 28 percent of the debt on the property.
"We did the foreclosure in order to move forward," said Bill May, a vice president at Miller & Smith. "We've been able to restructure and recapitalize the project and still move forward with the same plan." With the financing in place, he expects construction to get underway next spring. Plans call for up to 700,000 square feet of retail, 3 million square feet of office and 937 single-family homes to be built in phases, contingent on market demand.
Some experts wonder whether Vornado Realty Trust will follow in Miller & Smith's footsteps when the $160 million debt on the 1.4 million-square-foot Springfield Mall is auctioned off this week. The New York-based company purchased the regional mall for $35.6 million in 2005 to reposition it as a lifestyle center, with plans to add 175,000 square feet of retail, 1.1 million square feet of office and a 225-key hotel. Vornado Realty declined to comment for this story, but has indicated in past press releases a desire to move forward with the redevelopment.
"As long as things begin to get better in Washington, D.C., and the credit markets continue to thaw, these projects will begin to take shape," Coker said.