Malls are mispriced, Simon CEO says

In his own words, David Simon, CEO of Simon Property Group, “let the cat out of the bag” last week when he said enclosed shopping centers should be priced higher.

“The market absolutely unequivocally misprices big enclosed shopping centers,” he said. “Because if you look at the cash flow growth and the longevity, forget about it. But that’s fine with us, and it’s good for us.”

He pointed to the real estate investment trust’s recent purchase of Brickell City Centre in downtown Miami for more than $500 million. The center isn’t exactly enclosed—it has a glass shelter or canopy called a “Climate Ribbon”—but the point stands.

“Brickell should have been sold at an auction at a higher price than what we paid,” Simon said. “But the market is mispriced when it comes to high quality.”

While Simon said admitting this fact “is probably pretty stupid” from a competitive standpoint, the statement is ultimately an optimistic signal for the American mall, Rick Strauss, principal at Odyssey Retail Advisors, told Retail Brew.

“He’s probably trying to show investors that they are still confident,” he said. “They continue to grow their rent and their occupancy at Simon, and therefore he’s bullish on the mall sector.”

Malls are undervalued, Strauss explained, due to a combination of rising interest rates and longer-term shopping trends such as the growth of e-commerce, which for a long time many saw as being in a zero-sum competition with brick and mortar.

At the same time, the fact that many malls have seen better days is why there is now so much potential for those willing to invest: “That purchase price is a moment in time,” Strauss said. “What you do with that asset to raise that occupancy and/or rents is the upside potential.”

In other words, it’s because these malls have room to grow that their investment value is increasing.