by Privcap
January 12, 2016

Malls Aren’t Dead, Even In LA

Laurus Corporation is investing $30M in equity to renovate a mall in Los Angeles next to the Playa Vista neighborhood, the massive redevelopment of Howard Hughes’ former aviation empire that’s fast becoming known as SoCal’s own Silicon Valley.

Online retail is hitting its brick and mortar rivals hard. In November 2015, online shoppers outnumbered in-store visitors during the Thanksgiving and Black Friday sales period for the first time in U.S. history. Just weeks earlier Alibaba, the online shopping giant, broke world records with $14.3B of sales in 24 hours during China’s Singles Day.

Retail has been transformed. But that isn’t stopping private equity real estate managers from investing in the mall sector and underwriting growing sales in the coming years—especially in gateway markets such as Los Angeles.

Howard Hughes Center

Indeed, Laurus Corporation, with financing from Torchlight Investors, has acquired the 250,000-square-foot Promenade at the Howard Hughes Center close to LA’s Playa Vista submarket, betting precisely on such growth. That growth, however, won’t come from the stores that traditionally lined U.S. malls—it’s now all about lifestyle choices and experiences, says Laurus’ chief investment officer Austin Khan.

“At a fundamental level we see a lot of opportunities in retail,” says Khan. “We are already seeing a healthy amount of recovery and growth in household and discretionary income and, coupled with the fact that retail is becoming much more experiential, more specialized, that’s helping drive growth in the sector.

“When buying a new television, most people are likely to shop online to do their research and then get it delivered to their home,” concedes Khan, but adds: “What you cannot replace is going to a center to visit that new specialist retailer but also trying the great restaurant that’s next door to it. That’s what malls need to be today.”

And that’s the thesis behind the Promenade deal at Howard Hughes Center, acquired in June 2015 for $111M by Laurus— the real estate investment and development affiliate of real estate private equity firm, Ethika Investments. Ethika provided a majority of the common equity for the transaction, while Torchlight provided subordinated financing via a $37M preferred equity facility, according to data provider Real Capital Analytics.

Brought to the market two years previously by the prior tenant-in-common owner, Passco Companies, the mall failed to sell. The subsequent loss of tenant Nordstrom, however, pushed vacancy at the center from 7 percent to 27 percent and enabled Laurus to re-approach Passco to renegotiate pricing.

“Nordstrom giving notice to leave changed the dynamic of the discussion,” says Khan. “The pricing began to make more sense, not just because the owners faced this large vacancy but they also faced a maturing CMBS loan against the mall. They were caught between a rock and a hard place and it helped bring pricing down to a value-add opportunity.”

The mall is currently anchored by the cinema chain Cinemark with tenants such as Buffalo Wild Wings, Dave & Buster’s and Starbucks. Laurus plans a $30M renovation, half of which will be spent on changes to the common areas, outdoor space, access points, and on installing digital media stations. The remainder will be spent on tenant spaces, with a “high-caliber buildout” expected to start in early 2016.

The renovation is expected to increase rents from an average of $29-a-square-foot to up to $70-a-square-foot.

Khan says such rental growth will also be fuelled by the continuing development at neighboring Playa Vista—Brookfield Residential’s master-planned office, residential and retail community that once was home to the aviation empire of business mogul Howard Hughes. Now housing the likes of Facebook, YouTube, Microsoft, Google, Yahoo, with more than 220,000 square feet of shops and restaurants and 3,200 homes—and another 2,600 planned—Playa Vista is fast becoming known as the Southern California hub of Silicon Valley.

“LA is a great market, but a new submarket has been created here and you are seeing the market change dramatically,” says Khan. “In the next two to three years, there will be between 3,000 and 5,000 residents moving to this area and given the rents being paid for apartments in Playa Vista, those average household incomes will be around $200,000 a year.

“That purchasing power is going to change retail in the area. That’s why we’re re-energizing the space at Howard Hughes.”

Brick and mortar retail may be under attack from online rivals but for Laurus Corporation there’s still plenty of upside in mall investing, not least in Los Angeles’ Playa Vista neighborhood.

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