If you’ve ever wondered how sprawling suburban malls can stay open with just Native American tchotchke shops, a dozen vape stalls, and a massive “Kidz Zone” where Sears used be, The Wall Street Journal has an answer for you.
Shopping malls were once a staple of Americana— a symbol of prosperity that offered a tangible sense of community. The great American mall became ubiquitous in the 1960s and 1970s, as suburban growth exploded. Originally, they were anchored by legacy department stores like Sears and Filene’s that have long since faded into obscurity. But the rise of specialized competitors started the long trek toward new forms of commerce and gathering.
Despite this, malls remained the social and economic hubs of local communities for decades. You likely have fond memories of your local mall growing up. It might have been your go-to meeting spot; perhaps it’s where you had your first kiss. Even 10 years ago, you probably still dropped your kids off there for a movie, or simply to just wander. After the rise of online shopping, and the final death knell of COVID, the relic of a better time has all but ceased to exist. (RELATED: Retailers Brace For Slow Holiday Season As Inflation Bites)
In 1980, there were over 2,500 malls in America. Today, there are only 700. In 10 years, that number will be only 150, industry watchers predict.
Shopping malls with “ample parking right in front” continue to struggle and close across the country…
It’s almost as if we forgot people don’t come to a place for “ample parking right in front,” they come for the experience. pic.twitter.com/TSIov1bhew
— Jonathan Berk (@berkie1) June 29, 2023
The malls that do remain open are a pitiable sight to behold. With various ethnic gift shops, endless piercing and smoking paraphernalia, off-brand soaps and snacks, and seemingly abandoned arcades, you can’t help but wonder who actually patronizes these establishments. But that begs the question — how does anyone pay the bills?
This mall has sinkholes, two empty department stores and a partially collapsing roof—and its owners consider it a star of their portfolio https://t.co/GKpMVSJyCrhttps://t.co/GKpMVSJyCr
— The Wall Street Journal (@WSJ) November 27, 2023
Well, The Wall Street Journal figured it out, and the answer is as depressing as the malls themselves. In many cases, coastal elites buy up these “zombie malls” and keep them on life support just long enough to drain every last penny.
The Journal profiled the Berkshire Mall in Pennsylvania, a once thriving suburban hotspot now suffering roof collapses, sinkholes, and sewage backups, among other issues. It has been a blight on the community, with one local politician telling the Journal it would be better if a “sinkhole would open up overnight … and swallow the entire mall.”
Yet the mall’s owners, New York-based real estate partners Namdar Realty Group and Mason Asset Management, don’t see it that way. To them, the Berkshire Mall is one of the “stars” of their 80 mall portfolio. With many malls losing half or more of their value since 2016, owners often look to find a quick way out. Among the “most prolific purchasers of U.S. malls,” that’s when Namdar and Mason swoop in, cash in hand.
The Journal broke down their “counterintuitive” business model; malls can still be profitable, even as they draw their “last breaths.” Pay cash to score a better deal, then re-finance later. Carve up the lots — often located on prime real estate — and sell off the sub-divisions, sometimes for more than the purchase price of the mall. Reduce operating cost to bare bones staffing and maintenance, and court “nontraditional tenants” to subsidize cash flow even as big name retailers flee. Finally, appeal for property tax reassessment based on new valuations to massively reduce overhead.
They often resist offers from local developers who would re-purpose the properties as housing or offices, as local officials try to wrest back control of the properties anyway they can, the Journal reported.
The strategy has paid off. Per securities filings reviewed by the Journal, Namdar raked in an $86.7 million profit in June, up 8 percent from June 2022. Meanwhile, the owners are paying 86 percent less property taxes on the Berkshire Mall than the previous owners paid in 2019, a “direct hit to the borough’s school system and public services.”
Shopping malls with “ample parking right in front” continue to struggle and close across the country…
It’s almost as if we forgot people don’t come to a place for “ample parking right in front,” they come for the experience. pic.twitter.com/TSIov1bhew
— Jonathan Berk (@berkie1) June 29, 2023
“Most malls are not dying,” Elliot Nassim, president of Mason, told the Journal. “They’re just changing.”
There’s two ways to look at this. On the one hand, this is the free market at work. The owners are risking their own capital to rescue distressed assets, freeing up the previous owners to invest in new ventures and providing innovative solutions to struggling local communities. On the other, they are parasitic slum lords, draining potential value out of local communities to benefit primarily themselves.
There’s really no point in casting moral stones, however. This is a systemic problem that goes beyond individual investors, no matter how off-putting they may be. Most can agree that this sort of investing is not the ideal behavior when it comes to American financial innovation. But by accepting that anything the free market produces is an unquestionable good in itself, we’ve already detached capitalism from the moral foundation that allowed it to function in the first place. An equally detached type of investing is a logical corollary.
There were certainly wealthy people in America’s past, and not all of them were “good.” But the wealthy of past generations were often champions of local community. They built, not malls necessarily, but places of communal gathering — what malls used to be. Carnegie built thousands of libraries across America; Ford built trade schools, camps, and hospitals. Local economies were often built around a single wealthy family, whose factories provided a livelihood and sense of continuity for generations. It’s hard to imagine generations past squeezing dying establishments for their last pennies while the community around it languished. (RELATED: Investment Legend And Warren Buffett Partner Charlie Munger Dies At 99)
Yet our pagan devotion to the free market has created a rift in this social solidarity. Whatever’s most efficient is good, wherever that may be and whomever it may hurt or benefit. Government steps up to compensate the “losers,” and any last vestige of noblesse oblige falls away.
Namdar and Mason exist as a function of this society. Under this system, it’s not unreasonable for them to think “If I don’t do it, someone else will.” The question then becomes, how do we return to a society where no one else will — where this sort of profiteering is viewed as so innately shameful that there is unspoken, but mutually agreed upon, deterrence. There’s no easy answer, but acknowledging the problem — and re-evaluating the purpose of the market economy — is a necessary first step.