Two Did Not Become One, But Further Consolidation in the Shopping Mall Industry Still Possible
At this time last year, just as the leaves began to change color in New England, we reported on another significant change in its beginning stages, one that would have had rippling effects beyond New England’s borders. There were strong efforts at that time (almost as colorful as New England’s foliage) by a minority shareholder of General Growth Properties, Inc., the second largest owner of regional shopping malls in the U.S., to court a suitor for the acquisition of General Growth’s portfolio. One of the publicly targeted suitors was Simon Property Group, Inc., the largest owner of regional shopping malls in the U.S. In a turn of events earlier this year, however, the minority shareholder that had been courting Simon agreed to end its efforts (for four years anyways) in connection with a warrant purchase deal it reached with the largest shareholder of General Growth. If the acquisition had come to fruition Simon would have owned as many as one-third of the shopping malls in the U.S., strengthening its already formidable position in the shopping mall industry.
In light of these recent events, a forthcoming deal between General Growth and Simon appears less likely than it did at this time last year. However, based on recent reports about the shopping mall industry generally, there are reasons to believe that further consolidation within the already highly consolidated industry may still be on the horizon. For example, REITs that own regional shopping malls just reported the smallest increase in tenant sales per square foot in the second quarter of 2013 in three years, REITs have in recent months gone from the best-performing U.S. property stocks to the worst, the costs of borrowing are higher, online sales continue to challenge the vitality of brick and mortar operations, and there are limited chances to buy high-quality shopping malls because they rarely come on the market given how lucrative they are to the mall REITs that already own them.
All of this suggests that one of the best ways for a REIT to expand and improve its own portfolio is to consolidate with the well established portfolios of other similarly-minded REITs. As the real estate market continues to evolve, the potential consolidation of major players in the shopping mall industry continues to be a real possibility. Such consolidation should be followed closely as it continues to have the potential to be a real game changer.