The American Mall Progression

Ahh, the great and wonderful American classic, the indoor mall. It provides a setting for younger coeds to hang out unchaperoned for the first time and an oasis for those living in the suburban sprawl. Unfortunately for those who enjoyed these massive structures, the market has smartened up and evolved.

The Charlestowne Mall is located in St. Charles, Il, includes about 30 acres of land and is a hair under 400,000 square feet. The property was built in 1991 and became an undeniable loser by the early 2000's. It was once a humming environment of retail commerce and a weekend hot spot. This mall was one of two of its kind in the immediate area. It put a smaller, less accessible location out of business. The St. Charles Mall was built in 1979 and closed in 1995. No competition for Charlestowne in these early days and everything was hunky-dory.Today it is a large building that produces heat in the winter and air conditioning in the summer. It has three anchor tenants that got stuck in long leases; Kohl's, Carson's and Von Maur. There is an eighteen screen movie theater that is actually quite nice. Food; there is one gentleman who sells funnel cakes at the bottom of the non-running escalator. I assume he takes his act on the road in Summer. Think Carnivals.

Why did this happen?
1. Competition
2. A better product for the market

In September 2002, a developer saw weakness in the Charlestowne mall and delivered a swift punch that almost knocked it over. He built a leaner version of the senior mall that didn't require heating and cooling hundreds of thousands of square feet, didn't require security guards and didn't require as many employees to maintain it. The location was on a higher traffic road, an artery leading to a major highway, I88.It was named the Geneva Commons and he built an almost identical one 20 miles North in Algonquin. The size was similar to the former mall at 418,000 SF and was conveniently located 5.0 miles away from Charlestowne. The pricing was better, the location was better and everything was brand new. Retailers flocked and the project was a success...for two years.

Enter Simon Property Group. The 10,000 pound gorilla in the mall world with somewhere in the neighborhood of n 240mm leasable SF (600 Charlestownes). In May 2004, they broke ground on the Chicago Premium Outlets (located in Aurora). Their plans slated 438,000 square feet and was located in the most accessible location, on top of an on/off ramp for I88. To the east they have a nearly 200,000 population in Aurora and 9.4 miles away they had the Charlemmons gang. Close enough to scoop up their market. Soon after opening the Outlet mall, the once booming C Towne mall was knocked out old and would not be getting up. In Fall of 2013 the Geneva Commons were slapped with a foreclosure suit. Four months later, the sister property in Algonquin followed.

The Premium Outlets that Simon built were not as spectacular as the Commons but it did not matter. Construction costs were less which trickles down to the tenant. Fast forward through several successful years at the highly occupied outlet mall and it has been announced that they are adding an additional 290k square feet with 50 more stores tacked onto the already 120. There were 113 of these outlet malls in 1988. That number, today, is around 500. It seems the best mall has been built, for now.

Charlestowne Mall has switched hands a couple times and is currently owned by a California based investment company, which acquired it in late 2013. They have grandiose plans which were reflected in a drawing and statement that called for total revitalization of the property and a tentatively approved $20mm tax break from the City. My guess is that it will never happen. There were fences put up and some dirt moved around almost 2 years ago and nothing since has happened. The new ownership may have smartened up and realized that this play is a loser and there is too much competition. Why would any retailer leave the highway and outlet mall to go to St. Charles? They are not going to risk tens of millions of dollars without sound principles. If they do, it will end badly. The only use that works here is gaming (casino), OTB, etc. It is large enough, the closest competition is in Elgin and Aurora. The building has the right bones to be better than both but is lacking a river which is required by the state for a casino (an extremely outdated and funny law). They already got $20 mill from the city, why not ask for a gaming license?






"The depressing Easter Bunny"

The Shooting Star Asset Class

In  the early part of 2012, Warren Buffet was quoted saying, "I'd buy a couple hundred thousand homes." This quote was blasted all over several media outlets, as most investment thoughts that Warren Buffet has, is. The part of the interview that was much less highlighted was that he also believed it to be a impractical.

Right around this time several institutional investors (think huge companies, banks) starting buying hundreds and thousands of single family homes by the portfolios that banks and Fannie and Freddie were selling. The pools of these houses were available due to all of that great recession stuff you have heard about. Houses were foreclosed due to banks giving out money to people who could not afford to repay the loans. Almost all major lenders got in trouble for this subprime lending and have had to shell out almost $100 billion since 2008 in restitution to the federal government.

Until this time, the single family rental market was dominated by the local players owning 5-20 houses and producing some profits and tax shelters for themselves. However, with the banks selling them at the steepest of discounts, it would be hard to lose money on these and therefore easy for funds to pour billions into this investment. They are in it to make money, plain and simple. These activities produce some incredible benefits to several other entities including the renters, the local construction teams, realtors, management companies and most importantly, the cities and villages. It puts thousands to work and depending on the politician, jobs are the most important thing in the country.

Foreclosed/Real Estate Owned (REO) homes are usually left in awful condition. Someone is kicked out of their home by the law and that house then sits for months, sometimes years. It looks awful, brings down the neighborhood and usually smells awful. The benefit that this type of investing brings to the local communities is incalculable. They drastically improve properties that are in rough shape, actually pay their taxes and are providing carefully screened residents.Which is why cities should welcome these groups with open arms. Unfortunately, it is the opposite. Small time villages often view these funds and companies as  wealthy and decide to tax them until the get their share. The strictest of village codes are enforced, fees are constantly assessed and the paperwork does not end. The properties must bow to every violation that a city cites. Driveway cracked; fix it, dent in wall; patch it; landscaping not pretty; sod it, smells bad? bring out the mold team. If you don't fix them in 30-45 days the fines quickly reach the thousands and you will meet your local gov rep in court.While these properties are held to unreasonable high standards the house right next door that Joe Doe owns is collapsing and has 5 broken down trucks in the driveway but he is in compliance and not subject to any fees.

Remember the billions that the banks had to pay in fine to the fed? That money trickled down to the states and subsequently to the individual counties. The majority of counties reinvested this money into their market and it is a good idea. They purchase a "bad" house and hire a crew to fix it and sell it. Their biggest benefit is that they will provide additional down payment loans at 0% interest and are payable upon reselling the property. The counties do essentially the exact same thing with the goal of "increasing surrounding property values." They will complete maybe 5 homes a year and will receive a great amount of praise for their efforts. Just two weeks ago there was a full page article in a local paper that lauded the county for providing 1 home to a first time homeowner.

This new asset class is here for the short term but may just be a shooting star in the investment world, never to be seen again. The most substantial reason that is makes sense is that the properties were acquired so cheap. In order for that environment to replicate itself we would need a repeat housing crisis.

Little Haus, Big Development

You have seen the shows on HGTV and the articles written by revolutionary homeowners boasting about low energy costs, low build cost with their tiny home or "Micro" homes. The phenomenon is gaining more and more traction each day with the subject often ending at "that's cool" "I would love to live in one of those" "I think I could do that."When the conversation is over, however, it rarely leads to the construction of a miniature house.

In a broad sense, there are only two forms of residential customers; renters and buyers. The age old debate between the two is complex but the benefits of purchasing far outweigh renting in my book. This product creates a middle market between the two that is 1 part home ownership and 1 part leasing.

A developer purchases a large lot. The developer builds as many of these cute, little houses on the lot as possible. The monthly housing payment is way below market value for 1 bedroom apartments ($300-$400). The lots are leased to the renters at $150-$300/month. The builder has a fixed income and the potential to profit on the sales of the homes. The rental market is enamored by the product they can purchase at such a low entry price ($15,000 - $30,000) and hundreds of dollars in savings in utility bills. Magic.

Easy enough? The market is there. The rental market has never been stronger and there are several studies proving this. Millennials have been type-casted as the perpetual renters. This concept gives them an simple and inexpensive entrance into home purchasing.

 There would be several large hoops to jump through in order to accomplish this but it is possible.

1. Zoning, Villages, City Councils.
The seemingly most difficult subject. Would a village allow a large number of homes on a small lot? Would they require the lots to have separate PIN's? The pitch would boil down to the "tens of thousands of dollars in tax revenue to your city." There are enough struggling villages in Illinois that I believe one would take the bait.

2. Homeowner backlash.
The property is leased. The owner/operator has the discretion of screening occupants and entrance into tiny town. These standards can be created in unison with villages. These house could only be compared to themselves. These are not single family homes. They are single occupant homes. Appraisers would not be using these homes as comparables, therefore no surrounding areas home values would be compromised.

3. Financing.
Initially, many banks would not want to be providing $10,000 purchase loans. There are two solutions to this. The developer (if able) could provide retail loans after securing a large credit line. This could provide another income stream for the potential developer. Headaches, yes, profits, yes.
Work with local, regional banks and create a program specifically designed for financing this asset class. The loan terms would be short, 10 years, which is a much less intimidating option than the 30 year mortgage. A perfect solution for the always moving, changing millennial age group.

This post was inspired by viewing "Safety Towns" in different places around Illinois. It would chase the concept of a perfect town, similar to Celebration, FL, at a fraction of the scale.

I am sure there are holes in this concept. Please point them out.

Would you not like to live in a neighborhood that looked like this???