General Growth Properties CEO Sandeep Mathrani says a recession is coming, albeit a mild one.
The retail chief, whose company owns a stake in Manhattan’s famed Crown Building as well as malls across the country, is forecasting a dip in the market despite strong economic fundamentals, he said Wednesday, speaking on a panel at NYU’s REIT Symposium.
“If you’re in the A-class mall space today, there is still tremendous demand for space, rents are still growing with positive double digit spreads. We don’t see a slowdown in 2016 of the fundamentals,” he said. “That being said, I think we’ll see a mild recession post the election cycle in 2017 going into 2018 so it would be wise for us to plan our balance sheets for that to occur.”
Mathrani attributed a recent dip in store occupancy rates across the country – in his own company’s mall portfolio, same-story occupancy fell to 96.5 percent from 96.7 percent in the fourth quarter – to a “rationalization” by retailers who grew their footprints too quickly.
“The biggest issue is that America is over-retailed,” he said. “The reason we have so much square footage is that the retailers were so focused on growing that they increased their store counts. Do you really need 4,000 Walmarts, 4,000 T.J. Maxxs and so forth? Now, there’s a rationalization going on where retailers say, ‘How can I make my stores more productive and efficient?’”
GGP, the second largest mall REIT behind rival Simon Properties with a market capitalization of nearly $25 billion, diverted from its focus on malls last year to buy a stake in the Crown Building on Fifth Avenue and 57th Street in partnership with Jeff Sutton. The partners recently inked a deal with Ermenegildo Zegna, which plans to open a new 9,000-square-foot flagship store in the retail space. Bulgari has also taken space at the building.
Asked about his rationale for making the deal, Mathrani, who quashed rumors of a takeover by Brookfield Property Partners in February, offered the following explanation:
“When you look at the mall business, it’s pretty much consolidated across five public REITs, so it hard to grow,” he said. “The closest thing that comes to the A-class mall is an urban asset with high –productivity and a CEO to CEO relationship with the retailer. It’s probably the best retail corner in the world. We think it’s highly symbiotic.”
The GGP honcho, who received a compensation package over $39 million last year, wasn’t the only one cautioning of a blip in the market.
“Given how long this has gone on, we should have some kind of correction,” said his fellow panelist, Boston Properties CEO Owen Thomas. “The question is how deep will that be? Cap rates are quite low, particularly for Class A office properties across the country, certainly in coastal fortress markets. I don’t know how much upside there is in that, but it’s hard to imagine they’ll go much lower.”
Equity Residential Sam Zell also said Wednesday he expects a downturn in the upcoming year; he too predicts it will be mild.