LA Malls Do Better Than The U.S. Average, But Market Conditions Could Separate Winners And Losers

Malls in Los Angeles outperform the national average in key metrics, driven by the city’s general reputation as a shopping mecca, but the overall property market’s financial struggles lately could separate those that will succeed long-term from those that won’t. 

Los Angeles’ malls generate an average of approximately $800 per SF, a hefty premium compared to the U.S. average of $600 per SF, according to data from Green Street. Occupancy is about 90%, slightly above the country’s roughly 86%. 

Of the nearly 30 malls in its sprawling boundaries, two-thirds are rated within Green Street’s A level. 

"[LA] is one of the most competitive markets in the nation,” Green Street retail analyst Emily Arft told Bisnow. 

Nationally, the mall landscape has been swept up in a vicious cycle of plummeting valuations and changes in the way people shop, The Wall Street Journal reported in July. 

Many struggling malls across the country are defaulting on their debt or are about to, the WSJ reported. As traditional anchor tenants like department stores close and leave their spaces vacant, many malls struggle to replace these major drivers of sales and foot traffic. 

Los Angeles' advantages include a strong presence in the market of luxury and upscale retailers. This drives up the average sales per SF and creates a critical mass that builds on itself.

"Luxury retailers love the clustering effect. They really only want to sell where other luxury retailers have sold," Arft said. 

Looking forward, the hierarchy of malls can serve as an indicator of what LA’s mall landscape will look like in the near future. 

“The A+ and A++ graded malls we would expect to be viable retail destinations a decade from now,” Arft said.

But she added that even among these top-rated malls, there are some trouble spots. Arft pointed to the Beverly Center, which underwent an extensive $500M renovation in 2018 but “has struggled to find its footing” since. 

While two-thirds of LA’s malls are considered among the top-tier Class-A malls, seven are graded B- or below by Green Street. By one metric, they are considered only for their land value, as they aren't viewed as a viable retail property and Green Street considers them likely to be redeveloped or repurposed. 

“The malls that are graded, say, B- and below, and the C-quality malls that are within the Los Angeles metro, we would expect those malls to go away within the next decade,” Arft said.

Less successful, lower-end malls nationwide have seen major declines of 50% to 70% in their values from their 2016 peaks, the WSJ reported. Even the newer malls with prime locations have seen declines of 50% in the same period. This national “death spiral” applies largely to malls rated B- and below. 

Rising interest rates have hit malls hard, and the financial implications are making the distinction between the highest-rated malls and the lowest even more pronounced. Arft said the biggest driver in the change in asset values of malls, even the high-quality malls, has been the relationship between values and interest rates. 

“With the higher interest rates, it's a lot more difficult to find the financing for these big-ticket malls that can be $1B or more,” Arft said. “Because you can't find the financing for these specific properties, that dynamic higher interest rate means lower property values in general.” 

It isn’t impossible for those high-end malls. The Americana at Brand locked down a five-year, $450M fixed-rate mortgage in July. 

Westfield Century City, a top-tier mall, refinanced for $925M last month. The transaction valued the retail center at about $1.35B, according to KBRA. The mall, which is 95.4% leased, was appraised at $1.94B by Newmark Valuation & Advisory in May as part of the process of refinancing, according to the mall’s owner, Unibail-Rodamco-Westfield. 

At the time of the transaction, Fitch Ratings reported $200M in sales at the mall for the year ending March 31. The property is anchored by Macy's, Bloomingdale's and Nordstrom, but it also counts Tesla and Apple among tenants, which drive a lot of the sales, experts told Bisnow. 

Arft said she wasn't aware of any publicly disclosed defaults looming for top-tier malls in Los Angeles. 

“The higher-end malls that are doing well — with a good tenant mix, good demographics, in good communities, with really good experiential concepts — are holding value and still thriving, even if they are trading a little less frequently and perhaps have softened values,” Crexi Chief Operating Officer Eli Randel said.

“With transaction volumes being down, it's a little bit tougher to get these bigger deals done,” JLL Managing Director Bryan Ley said. “Big deals require a lot more lift. There’s more scrutiny.”  

But lower interest rates alone aren't enough to help malls that are already in decline. 

"A decrease in interest rates would make investment capital less expensive and more readily available and therefore would compress required yields and prop up the values of successful and thriving malls," Crexi's Randel said. 

But struggling or dead malls would likely still be in trouble, as many of them would be difficult to finance even if the cost of capital decreased slightly, Randel said. 

Many are slated for redevelopment already, like the Baldwin Hills Crenshaw Plaza, which has been approved to add retail, residential and a hotel — an estimated $1B overhaul — to the existing site of the retail center near the Crenshaw Line light rail, which opened last year. 

The Eagle Rock Plaza mall, which sold to a joint venture of Atlas Capital and Eastern Real Estate for $76M in 2021, was said to be slated for redevelopment, possibly getting some residential space added to the property. 

“A positive for the LA market is you do see a lot of landlords funneling a lot of capital into redeveloping their malls within this specific market,” Arft said. “The influx of capital from these mall owners is a good sign that the market is doing well and should continue to do well in the near term.” 

UPDATE, SEPT. 13, 11:12 A.M. PT: This story has been updated to add context to comments made by Bryan Ley.