05 Apr 2016

Dead, ugly malls turned into productive real estate again by Dallas duo

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Dallas real estate veterans Frank Mihalopoulos and Anthony Ruggeri have a sixth sense: they travel around the country to see what most would call dead malls.

So far, Mihalopoulos and Ruggeri have gotten their hands on four dying malls in Tennessee, Pennsylvania, Georgia and Wisconsin. And they are seeing success.

They talk about turning malls inside out, running a street through the middle and bringing in tenants that people want. There’s no magic formula, because each property has a different set of circumstances, they say. The common thread is their willingness to do the local homework required to find out how to turn a dying mall into a vibrant, productive place again.

The malls they bought are familiar places. They could be Irving Mall or Collin Creek in Plano, which have lost major tenants in recent years. An estimated 15 percent of the more than 1,100 enclosed U.S. malls are forecast to close or be repurposed over the next decade, according to real estate research firm Green Street Advisors.

The reasons are familiar too: A new, more convenient open-air shopping center opened nearby; the department store closed, sameness set in. A shrinking middle class, a rising millennial shopper and e-commerce competition piled on to make some malls obsolete.

The original major mall developers who built these big public places are ditching them, selling them off to other companies or investors, just getting them off their books.

But the shells remain, long after they are abandoned as a center of community life.

The first mall looked at by Mihalopoulos and Ruggeri was in Nashville in 2005. Pre-GPS, when you rented a car at the airport, you also got a local map printed on paper.

Their destination, One Hundred Oaks mall, was on the Hertz map. “We looked at each other and both thought we never owned anything that was on a rental map before,” Mihalopoulos said. “That really impressed us.”

“Then we got there and it was the ugliest mall we’d ever seen,” Ruggeri said. They bought it for $50 million.

One Hundred Oaks Mall in Nashville, which had a six-story, 440,000 square-foot office tower attached to the same amount of retail space, was gutted and remodeled over several years. Medical clinics and administrative offices for Vanderbilt University Medical Center bring traffic to the center. Today, it attracts customers from nearby affluent neighborhoods who years ago had stopped going to the mall that was built in 1968. Tenants include T.J. Maxx, Michaels, Ulta, Kirklands and Panera. The property is now worth more than $120 million. In 2012, the Texas developers sold it at a profit even after spending several million on improvements.

In February, Mihalopoulos and Ruggeri purchased Northlake Mall in Atlanta and Forest Mall in Fon Du Lac, Wisconsin for $30 million from WP Glimcher, a spinoff of Simon Property Group, the nation’s largest shopping center owner.

They have new confidence having successfully reimagined the Nashville mall and another one, West Manchester Mall in York, Pa., which was a classic old-style, enclosed mall on a dying trajectory. Northlake Mall has 961,835 square feet and is anchored by Macy’s, Kohl’s, J.C. Penney and Sears. Forest Mall has 504,777 square feet and is anchored by Kohl’s and Younkers department store.

Redeveloping ailing malls is a growing niche that requires patience, something that big shopping centers developers have decided they don’t have, choosing instead to focus on their A properties.

Malls are graded according to common metrics like sales per square foot and mix of tenants. The B, C and D malls have been dropped at an accelerated pace by the big companies that built them decades ago. The big shopping center developers, Simon, General Growth, Macerich and others have put batches of malls into new real estate investment trusts and spun them off to new owners. Some of those properties end up in foreclosure. Some are sold again for a few more years of cash flow.

But a few are rediscovered by new owners with fresh eyes.

Mihalopoulos, 60, and Ruggeri, 61, met well into successful careers apart. Ruggeri was bidding for sports memorabilia against Mihalopoulos’ wife, Maryann, at a school auction. Then a business lunch put them together again. Now they call themselves the Frank and Tony show and finish each other’s sentences and bid together for malls that have seen better days.

Mihalopoulos and Ruggeri sat down for a Q&A with The Dallas Morning News. Here are some of their edited comments.

Malls have been on a decline for a long time. What do you think happened?
Ruggeri: The heyday was back in the 1980s. Think of all the department stores we had in Dallas, Sanger Harris, Joske, Bloomingdales, Saks, Dillard’s, Lord & Taylor. They were all viable anchors, and each mall had a completely different mix of national and local retailers. Then the consolidation in retail made the malls all homogeneous. As long-term leases came up, retailers didn’t want to keep two stores open so close together. So they closed one and the weaker mall goes into a slow decline as the quality of tenants falls off the cliff. Then the physical appearance starts to go down.

What’s your formula for fixing that?
Mihalopoulos: There are no magic numbers for a redevelopment. Each project is unique. It depends on where it is in its market and the population density, income levels the physical layout and competitive pressures in the market. Is there a new development that’s siphoned off the business? Then you may have to reimagine the property as something else. In Nashville, we didn’t just put lipstick on it. This was a major transformation once we discovered Vanderbilt University Medical Center was looking for a place to grow. Doctors knew their patients didn’t want to come to the hospital around sick people for regular appointments.

How can you go into a market where you’ve never lived and redevelop the mall? It seems like such a local project.
Mihalopoulos: We work with local brokers, local architects and engineers. We don’t come barging in and acting like we know it all. We listen to the local experts. People say you guys are onto something, but really it just takes a lot of work. For every 20 we look at, there’s one that we’re interested in pursuing.
Ruggeri: For the Nashville project we were there two days a week for a year and a half. This isn’t easy work.

You said you de-malled West Manchester Mall in York, Pa. What does that mean?
Ruggeri: We turned this mall inside out. It’s transitioning from a mall to a town center. We have buildings with four walls and a ceiling and give it a new outdoor entrance. In a mall you have retailers facing each other. We got rid of the inside of the mall.
Mihalopoulos: It’s great real estate, but this wasn’t a two-mall market, and our property is closer to the north side of Baltimore, which makes it a 30-minute commute. We’re closer to some of the best neighborhoods. We have the better housing stock. We knocked down one empty anchor store and created a pad for restaurants. There were several stores that weren’t there yet that wanted into the market. A couple from Texas, Dickey’s Barbeque and At Home is taking over an old Macy’s building.

How do you make it work financially, do you depend on funds from the city?
Ruggeri: We structure deals without city funding. That’s a much sounder way of doing one of these projects. We don’t base the work on getting a check from the city.
Mihalopoulos: The city may provide funds for a new road or some public space improvement, but that’s not in our model. Something like that would represent less 4 or 5 percent of the total project.
Ruggeri: A lot of our success has to do with repurposing existing buildings. Some people say, ‘This is an old tired place. Just knock it down.’

Your current projects are in Atlanta, I get that, but what are a couple of guys from Texas doing in Fond du Lac, Wis.?
Mihalopoulos: Fond du Lac is great. It’s not far from Milwaukee and on Lake Winnebago. There’s a branch of University of Wisconsin, and Mercury Marine is there. They make boat motors. We can easily turn it inside out like we did in York, Pa. There are big box stores that want to come into the market.
Ruggeri: Northlake in Atlanta is 80 percent occupied,but it’s filled with an odd collection of tenants. It has four nail salons. It looks like a small business incubator. But it’s inside the perimeter, or what they call, “inside the loop.” There are a lot of regional corporate offices in the area.

Mihalopoulos: It still has its anchor stores: Macy’s, J.C. Penney, Sears and Kohl’s are open. And Macy’s is closing a store nearby at North Dekalb Mall, which should help Northlake’s Macy’s. We’re still working on plans for it. We may try to bring in a health system. That would generate traffic.
Ruggeri: There’s a shortage of restaurants in the area. There’s some energy for outdoor spaces we can tap with a grassy area, just thinking about the Katy Trail in Dallas or the Rustic.

When are you going to do something in Texas?
Mihalopoulos: We would like to do something in Dallas, if we could do Collin Creek, we would do it.

Twitter: @MariaHalkias

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