For decades, malls were the places to be. But consumer tastes changed, and as malls started falling out of favor, some mall operators (and their commercial landlords) tried something new: They installed amusement park features inside the malls, hoping to get people back.
We're not talking about a simple merry-go-round. We're talking full-fledged tourist destinations complete with laser tag, waterslides, and mini golf. These entertainment extravaganzas cost some malls billions of dollars -- and the idea appears to be a big flop.
Malls are defaulting
Pyramid Management Companies of Syracuse, New York, owns several malls that invested in these mega-entertainment venues. This mall owner racked up $1.6 billion in mortgage-backed securities debt across 11 malls and is going through the process of debt restructuring for some properties. Triple Five Group of Edmonton, Canada, which owns Mall of America and American Dream, has also accumulated more debt than this mall owner can handle: $2.7 billion in loans.
Will people return?
The damage has already been done in many malls as mall entertainment centers have already been built, such as Destiny USA and Palisades Center in New York, Mall of America in Minnesota, and American Dream in New Jersey. These malls can only hope that people will start coming again after the pandemic is over and/or people get vaccinated. But will they?
Meanwhile, payments are coming due for the huge amounts of money these malls have borrowed. The new mall entertainment areas have become what one president of a retail consulting firm calls an "unsustainable expense."
Mall operators, thinking the only battle they had to fight was online shopping, focused their strategy only on that potential hurdle. The amusement-park-inside-the-mall idea was to give people a reason to come to the mall again and create an experience they couldn't get at home. It was an expensive bet, costing mall owners millions (and in some cases, billions) of dollars.
Mall owners didn't factor in other, even bigger, obstacles
It's true that malls started their decline as people started shopping online. But another factor badly hurt them: the live, work, play phenomenon. People wanted a different shopping experience from enclosed retail fortresses, otherwise known as malls. The public instead wanted open-air shopping destinations with more of a community feel and preferably in a walkable destination.
Then came COVID-19, which could be the straw that broke the (carousel) camel's back. People stopped going to indoor entertainment spaces altogether during the pandemic. Even if they wanted to go, they often didn't have the option, since many entertainment venues were under lockdown orders.
Some bright spots
Banks probably won't foreclose until it's clear regarding whether people will return to these entertainment center malls. The reason: Just as banks prefer not to foreclose on people's homes since they aren't in the real estate business, they certainly don't want to run an entertainment venue. Better for the lenders if the malls succeed and pay their debt.
Another problem for malls that added entertainment spots is the mall anchor stores and smaller tenants leaving. Destiny USA, for example, is currently only 70% occupied, down from its peak occupancy of 97% in 2013. But new stores are in talks with the mall and will be opening later this year, such as popular women's clothing and home store Anthropologie (NASDAQ: URBN).
The Millionacres bottom line
Entertainment centers in malls were popular with families pre-pandemic. When things open back up again after the pandemic subsides, these malls might recover. It just depends on how long malls can wait this out.