Within the mass movement by mall owners to recast drained, unproductive or vacant square footage into alternative uses, Macerich seems one step ahead.

The Santa Monica, California-based mall owner and operator is steadily repurposing its square footage, in several cases transforming closed department shops or underutilized parking lots into residences, offices, hotels, experiential concepts reminiscent of museums and fitness centers, electric vehicle showrooms, large-format entertainment, more food and beverage, and with a wide range of direct-to-consumer brands wanting to add brick-and-mortar locations. 

“Today, probably 15 to twenty percent of our portfolio is non-traditional use, and I could see it going as high as 30 to 40 percent,” said Tom O’Hern, the chief executive officer of Macerich.

“We’ve got 44 properties and I’d say 30 of those are performing some type of diversification and densification.”

That’s exactly what’s driving the strategy at Macerich, which next 12 months marks its sixtieth 12 months in business and 30 years as a public company.

Inflation and better rates of interest make it dearer and riskier to finance redevelopments, and offices and apartment buildings involve high levels of capital expenditure. Furthermore, all these investments are relatively recent to Macerich, adding to the danger. However it’s imperative that Macerich, and for that matter all the shopping mall industry, proceed to adapt to the impact of Amazon and web shopping, declining traffic counts in malls, and the way consumers are spending more of their discretionary dollars on travel, dining, spas and entertainment, and fewer on material goods.

While brands and retailers have change into cautious and limited with their expansion plans, Macerich has been busy re-merchandising and redeveloping much of its real estate with a differentiated, alternative mixture of tenants and adding square footage to existing assets which might be productive. Having culled its portfolio through the years so it’s stacked with mostly “A” malls situated in lots of the country’s best urban and suburban markets works in Macerich’s favor. So do recent improved quarterly metrics and last 12 months’s lack of retail bankruptcies. There have been no bankruptcies inside Macerich’s portfolio within the fourth quarter and just three for all of 2022. In a recent conference call with investors and industry analysts, Macerich cited a “significantly reduced” tenant watch.

Macerich executives regard their redeveloped properties as “regional town centers” where people can live in apartments and just steps away from work, shopping, dining and being entertained in other ways.

At Kierland Commons, an open-air center in Scottsdale, Arizona, there’s a 110-unit luxury apartment project being built on a car parking zone. At FlatIron Crossing in Broomfield, Colorado, a 330-unit luxury multifamily project centered around 2.5 acres of public amenities is on the drawing boards.

At Biltmore Fashion Park in Phoenix, Macerich is planning a 10-story, 250,000-to-300,000 square-foot office tower, a 250-to-300-unit luxury apartment complex, and adjoining space for retail and food and beverage establishments.

“It’s not at all times about adding residential,” O’Hern explained, discussing Macerich’s strategy over coffee in Manhattan’s Flatiron District. “At Santa Monica Place, for instance, we don’t have the room for residential. But we’ve diversified by bringing within the Arte Museum. It’s from South Korea. The lease is signed and the museum ought to be open in the primary half of 2024. It can occupy an old, nonproductive 45,000-square-foot theater space on the third level of Santa Monica Place and switch it into what’s effectively an immersive digital art gallery. So you may walk right into a room and feel such as you’re in the course of a wave crashing down on you.”

Currently, there’s just one Arte Museum within the U.S. open to the general public, on the Las Vegas Strip.

Increasingly, Macerich leans toward experiential-type tenants. Life Time, the upscale “athletic county club”; Scheels, the sporting goods and entertainment chain; The Dr. Seuss Experience; The World of Barbie; Pinstripes for bowling, bocce and bistro; Round1 Bowling & Amusement, and Studio One fitness centers have emerged at certain Macerich centers. There’s also the Cayton Children’s Museum on the third level of Santa Monica Place.

While a museum may not generate very high sales per square foot, it draws traffic that theoretically lifts business at nearby stores and restaurants. Macerich expects the Arte Museum to draw about 1 million visitors a 12 months.

“People bring energy to the mall. People and energy equate to retail sales and improving retail sales equates to higher rents,” O’Hern said.

On the more traditional side of the Macerich equation, construction is underway at Scottsdale Fashion Square to increase the middle’s luxury presentation to the south wing, anchored by Nordstrom, to accommodate additional luxury brands and dining. An 11,000-square-foot Hermès can be joining such brands as Brunello Cucinelli, Dior, Gucci, Dolce & Gabbana and Nobu. Previously, a former Barneys Recent York department store was replaced with an Apple store, and Industrious, marking the primary time the shared working space concept has moved right into a mall location.

“The leasing environment is as strong as we’ve ever had. Quite frankly, it’s higher than before the financial crisis of 2008,” said O’Hern. Last 12 months, Macerich signed 974 leases totaling greater than 3.8 million square feet. Leasing spreads, the difference in costs between the old and recent or renewed leases, were up 4 percent.

At the tip of the fourth quarter of 2022, Macerich’s malls were 92.6 percent leased, a rise of 110 basis points over Q4 2021, and a 50-basis point sequential improvement over Q3 2022.

“Full occupancy,” O’Hern said, could be considered 94 or 95 percent leased. “There’s at all times going to be some fractional emptiness as we move tenants around. But we’re not chasing occupancy. Now we have more of a possibility to enhance the rental rate.”

Industry reports indicate the corporate (an actual estate investment trust) is expecting $56 million growth in annual rent income from store openings this 12 months through the tip of 2025.

Macerich’s same-center net operating income (NOI) increased by 7.5 percent within the fourth quarter, marking the second straight 12 months of NOI growth exceeding 7 percent. 

For 2022, sales per square foot for tenants under 10,000 square feet averaged $869, a 7 percent lift over 2021. Total revenues got here to $859.1 million, up 1.4 percent from 2021. 

O’Hern said that traffic is tracking 95 percent of pre-COVID-19 levels and that retail sales are closer to 115 percent of pre-COVID-19 levels.

The corporate has strengthened its financial position by reducing debt levels in 2021 alone by $1.7 billion, a 20 percent decrease, though the long-term debt continues to be high at about $4.5 billion at the tip of 2022. The stock is currently trading at about $10 a share, down from the 52-week high of $14.83 and up from a low of $7.40.

A possible property transaction could reinforce the balance sheet. “We’re working with the owners of the Philadelphia 76ers to potentially bring a sports and entertainment arena to Fashion District Philadelphia,” O’Hern said. It’s where Macerich has a three-block stretch of retail that was rebuilt and re-opened in 2019. “We’d sell one among the blocks to the Philadelphia 76ers and they’d put in an arena.” If that happened, “We must always see an incredible collateral profit.” The 76ers NBA basketball team currently plays in Philadelphia’s Wells Fargo Center.

In accordance with company information, in 2022 “Macerich drove a big amount of financing activity, demonstrating that the debt markets for its A-quality regional town centers are improving and the corporate is getting deals done.”

Macerich’s portfolio is concentrated in California, the Pacific Northwest, Phoenix/Scottsdale, and the metro Recent York to Washington, D.C., corridor. Macerich owns 47 million square feet of real estate. Macerich disposed of several non-core and fewer productive assets over the past 10 years, to take a position capital in its most efficient assets.

“When you go down our list of properties, you simply see lots of really high-quality assets, a few of one of the best within the country,” O’Hern claimed, citing the Queens Center within the Elmhurst section of Recent York City, amongst other properties. The Queens Center, which is predominantly occupied by traditional, moderate-priced retailers, generates greater than $1,000 a square foot, O’Hern said. It’s fueled by the dense and diverse population of the borough of Queens. Last month, Primark, the value-oriented fashion retailer from Ireland which first entered the U.S. in 2015, joined the Queens Center’s retail roster. Macerich is bullish on the concept and has thus far brought Primark to seven malls.

One other top-performing Macerich property is The Village at Corte Madera in California, which generates near $1,500 in sales a square foot, based on O’Hern.

Tysons Corner Center in Virginia, one other of the highest centers within the portfolio, is a major example of the densification strategy, with recent additions of an office tower, a residential tower, and a Hyatt Hotel. There’s even a train station attached to it, and a former Lord & Taylor that’s being considered for office or residential use or a mixture of the 2.

“The A mall today is far different than it was 10 or 15 years ago if you’d have department shops, apparel stores, footwear. You’d have a bit little bit of food and beverage, which regularly times was only a food court. Taking a look at the leasing volumes today it comes from not only traditional retail, but in addition nontraditional concepts like Life Time, which is a high-end fitness center. They get roughly 5,000 member visits every week. They’re just now coming to the West. We’ve got one open in Phoenix within the Biltmore Fashion Park they usually’re doing extremely well there. They’d the misfortune of opening in March of 2020,” the start of the pandemic. “But they’ve overcome that they usually’re doing quite well. We also just opened a Life Time in Scottsdale Fashion Square and later this 12 months Life Time will open in Broadway Plaza,” an open-air center in Walnut Creek, California. “They pay an honest rent and produce in lots of people, and folks drive retail sales.”

At Santa Monica Place, the primary two levels were formerly occupied by Bloomingdale’s, which closed. The positioning did see numerous businesses close through the pandemic. But Din Tai Fung, a famous Asian restaurant, is opening on the third level with an outside dining deck overlooking the ocean. Din Tai Fung also operates at Macerich’s Washington Square mall in suburban Portland, Oregon. “Individuals are known to line up for an hour to get in,” O’Hern said. Also, Studio One, a high-end fitness center, is entering into. It’s expecting to attract roughly 4,000 member visits every week.

On the Chandler Fashion Center in suburban Phoenix, a 220,000-square-foot Scheels superstore is replacing a former 144,000-square-foot Nordstrom department store that closed through the pandemic. Macerich hurried there. One week after acquiring the box, Macerich revealed the cope with Scheels.

“Scheels has every part. It’s very experiential. I used to be blown away the primary time I walked right into a Scheels. They’ve a Ferris wheel in the course of the shop, and 16,000 gallon aquarium. We’d expect their sales volumes to be 4 times what the department store did.”

Macerich’s “densification and diversification” strategy has been happening for six years, through the pandemic. “Regardless that COVID[-19] was happening, we did lots of leasing during that period to experiential, nontraditional uses,” O’Hern said. “A lot of those are being built out today. Traffic will proceed to uptick as we open a few of these experiential deals that we’ve signed. We’ll get the advantage of those with the traffic as we move into 2024 and 2025.”