Repurposing once-great American retail

I still remember when WestGate Mall was the center of the universe.

Or at least the center of Spartanburg, South Carolina, and the larger upstate area.

When it opened in 1975, it was the largest mall in the region and a symbol of prosperity for our community. Anchored by Sears, Belk-Hudson, and Meyers-Arnold, WestGate quickly became the dominant retail destination in the area.

For decades, it thrived despite changing hands several times. So it was more than worth the heavy renovations CBL Properties (CBL) did in the 1990s when it owned the mall, adding new anchors and expanding the center’s overall footprint.

I remember it well, not only because I lived there but also because I was developing smaller shopping centers at the time. And let me tell you, business was booming.

New retail plazas were popping up all over. Department stores were expanding. And lenders were outright eager to provide financing.

Developers like me couldn’t build fast enough… which probably should have clued us in that we were at the peak of the real estate cycle.

Yet nobody saw the storm clouds gathering. And we certainly didn’t think millions of people would one day purchase everything from books to bedding to beach gear online.

So the next decade took us by surprise, to say the least.

Really, the financial crisis and rise of e-commerce did commercial real estate (CRE) investors a favor though. It exposed how foolish the real estate market had been and how much leverage we’d taken out. It forced us to reconsider what levels of growth are truly worth it.

And it taught us that location matters. Immensely.

One of investors’ biggest mistakes during the CRE buildup back then was assuming malls of similar size were equally valuable.

They’re not.

For instance, when WestGate Mall began to struggle in the mid-2000s, Haywood Mall in nearby Greenville continued to thrive. The difference between the two wasn't management – although that’s an exceptionally important consideration, too.

It was demographics.

You see, regional malls tend to require populations of at least 750,000 within their trade area to engender continuing success. Retail, after all, is a supply-and-demand business; and malls with their dozens of stores have a lot of supply to sustain.

Back in 2019, I published an article on Seeking Alpha that examined the top 90 metropolitan statistical areas (MSAs). And my ultimate conclusion was brutal: that “there should be 225 malls in the U.S.” instead of the near 1,500 there were at the time.

My hometown of Spartanburg might be growing by leaps and bounds now. But it was and is a smaller market than Greenville.

So even when times got tougher, Haywood Mall continued to attract foot traffic… while secondary-market retailers just couldn’t keep up.

Seeing that reality play out is one reason why I got so bearish on several mall real estate investment trusts (REITs) even before Covid hit. In 2019, I recommended avoiding CBL Properties (CBL), Washington Prime, and Pennsylvania REIT for this very reason.

And, sure enough, all three ended up filing for Chapter 11 bankruptcy in the next few years.

Many investors blamed the shutdowns for everything. Others said it was e-commerce’s fault. But the fact is that many poorly placed malls would have had to shutter eventually regardless.

There were simply too many of the giant retailers built wherever they would fit. And that kind of haphazard placement rarely ends well with CRE.

WestGate’s decline didn't happen overnight, for the record. Again, back in the mall boom days, that place was hopping.

According to then-owner CBL's annual reports, the mall carried a gross book value of about $67 million to $72 million for years. Yet debt also remained substantial at $36 million to $46 million, and its economics were deteriorating slowly but surely as retailers like Sears failed.

Nobody saw the value of filling those emptied spaces. They were too busy securing locations where population size and growth justified their presence.

By 2022, WestGate’s carrying value was down to just over $6 million – with around $29 million of debt outstanding still. Receivership followed, and the property transferred to the lender as a practically worthless piece of equity.

I pass the property often enough these days, and it stands as a sad example of location gone wrong. Whereas Haywood Mall continues to thrive, with new retailers being added each year.

The retail apocalypse couldn’t kill it. Nor could the shutdowns. It’s where the people are, and that’s enough to mean that it continues to collect capital.

Haywood Mall is operated by Simon Property Group (SPG), a mall REIT that makes sure to only hold the best properties in the best locations. That company is doing great, as are its shares, which are too high to purchase right now, in my estimation.

But that’s okay because I want to focus on WestGate, the retail loser, in this article.

Healthy investing isn’t just about identifying winners. It’s also about recognizing what, when, and how winners shift into something less desirable. And that shift has definitely happened for most malls; they’re quite simply not the pinnacle of CRE anymore.

Digital infrastructure is. Companies like:

Together, they command hundreds of billions of dollars in market value.

They own the infrastructure that powers the cloud computing, artificial intelligence, wireless communications, and e-commerce modern society is increasingly built on. And that puts them in enormous demand.

Perhaps even the kind of demand WestGate can benefit from…

Today, a walk through WestGate feels very different than it did during its glory years.

What was once a dominant retail destination now consists largely of discount retailers and temporary tenants. There are an increasing number of vacant storefronts, and the parking lot is filled with empty spots.

So as it continues to decline in retail value, I have to wonder… What comes next?

If it were up to me, I might very well turn WestGate into a data center. The site already features many aspects that large-scale infrastructure projects require.

It has significant acreage, existing utility access, transportation connectivity, and proximity to a growing regional economy. So while the current building would need to be razed and new ones would have to be built, it still could work out very well in the end.

Not to mention how it would support investment, tax revenue, and technology-related growth for decades to come while serving the infrastructure needs of a digital economy.

Perhaps that’s the real lesson to take away from WestGate: that the investment goal isn’t to preserve every asset exactly as it was. It’s to adapt land and capital accordingly.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

P.S. I know my repurposing proposition is controversial for many these days – including in Spartanburg, which successfully shut down a data center project earlier this year. For those of you worried about what these properties entail, please check out my “Open letter to my fellow Spartanburgers.” It might put your mind at ease.

Here’s an abbreviation that might be new for you: HALO.

In the investing world, it now stands for businesses with “Heavy Assets” and “Low Obsolescence.”

Attributed to Ritholtz Wealth Management CEO Josh Brown, HALO investments are assets that AI just can’t disrupt, from major oil companies to major food companies to major retailers.

Ritholtz has his list, of course. And Wide Moat Research has ours… including some with compelling valuations I cover in this week’s Wide Moat Show.

Catch the full episode right here.