Pacific Retail Capital Partners Buying Big In Distressed Malls

The slow march America’s malls have made toward irrelevance is a well-known fact in many parts of the country, but Pacific Retail Capital Partners is betting big that some malls can be saved.

Despite the stark statistics around malls and retail in general over the last 10 years, Century City-based PRCP is so confident it can pry value out of previously disregarded properties that it dropped $425M on two malls last year. 

By paying attention to inflection points for these distressed assets, pinpointing the best moment to snap them up and then executing renovation plans, company executives plan to reinvigorate the 1M SF of enclosed mall real estate added to its portfolio in 2023. What’s really valuable in these transactions is the land, according to PRCP Chief Financial Officer Oscar Parra.

“The reality is we unencumbered the dirt,” Parra said, noting that sometimes entails rezoning land and renegotiating reciprocal easements. “All those efforts have resulted in being able to unlock development value that sits below the mall.”

Specifically, PRCP purchased the Bridgewater Commons in Bridgewater, New Jersey, and The Shops at Palm Desert, formerly a Westfield mall, near Palm Springs, California. 

The retail sector has demonstrated a renewed resilience overall in recent years, but like many commercial property types, retail landlords are dealing with distress. Loans attached to retail properties accounted for $21.9B in distress nationally in the first three months of this year with another $28.4B in potential distress, according to MSCI’s Q1 2024 U.S. distress tracker. 

But PRCP’s plans for both sites are part of a strategy that leans into that sentiment. The company bought these properties specifically because they need to change to survive, and PRCP has a plan to kick-start that evolution. 

PRCP is repositioning malls through a number of strategies, including lining them up to be partially redeveloped into multifamily and other uses. That can involve assessing the actual retail needs of the site and securing new tenants accordingly, or doing the dirty work of negotiating amendments to easement agreements with anchor tenants and rezoning portions of the property. 

“We call it clearing the path,” Parra said. 

Many of the executives at PRCP came to the company from Westfield and were familiar with the Palm Desert property. When the loan on the mall was transferred to special servicing in 2020, the company was interested in helping breathe new life into the property.

The city of Palm Desert is enthusiastic for the site in its borders to be redeveloped, whether it's multifamily, hotel or a mix of new uses. Having local officials that are open to redevelopment is part of what PRCP looks at when evaluating new opportunities, and this one certainly fits the bill. The mall in Palm Desert “probably has a lot more retail than it needs,” Parra said, so having the city on board with rezoning is ideal.

Another critical juncture in the form of loan maturation was when PRCP zeroed in on Bridgewater Commons. The loan matured in 2022 without being paid off. Special servicer comments said the shopping center was “a victim of obsolescence, store closures and, more recently, disruptions caused by COVID-19,” according to Trepp. 

The Bridgewater Commons transaction included the purchase of the Village at Bridgewater, a 94K SF open-air mall next door to the Commons.

At Palm Desert and Bridgewater, rejiggering the retail and some rezoning is probably all it will take to get these properties ready for their next phases and their next owners, Parra said.

Parra says the amount of retail at the Bridgewater site is probably going to be scaled back, but not as dramatically as Palm Desert. The community, near Princeton University, “looks like they have all of the housing they need there,” but the site might lend itself to medical or biotech uses, he said. 

In both the Palm Desert and Bridgewater transactions, PRCP assumed existing loans on the property — $300M at Bridgewater and $125M at Palm Desert — secured modifications and extensions to those loans and got to work. 

No new debt was involved, Parra said. 

“It was a straight handoff,” Parra said, adding that both loans were assumed at par, or the current loan balance. “Both of those loans were fixed-rate loans and had interest rate coupons that there's no way to replicate in today's market.” 

PRCP did negotiate four-to-five-year extensions to the loans. 

That's typical for a transaction like this, where there has been a recapitalization and a new direction for the property is going into effect, Parra said. 

“The idea is, you're going to enact a fresh business plan and you need time for that business plan to play out,” he said.