Simon, Brookfield face tough road ahead for their South Florida zombie malls

The outlook for the owners of two South Florida zombie malls looking to refinance maturing nine-figure loans next year is pretty grim.

Even with recent interest rate cuts, Simon Property Group and Brookfield Asset Management face a tough road convincing commercial mortgage-backed security lenders that Miami International Mall in Doral and Pembroke Lakes Mall in Pembroke Pines can be turned around into viable retail assets, according to commercial real estate financing experts.

The most logical solution for the mall owners would be to consider adding apartments, which would create a steady new stream of customers and generate additional property revenue.

Simon, an Indianapolis-based, retail-focused real estate investment firm led by CEO David Simon, owns the 303,000-square-foot central component of Miami International Mall at 1455 Northwest 107th Avenue. The 96-acre site includes about another 700,000 square feet across five big-box stores owned separately by other firms.

Brookfield, a Toronto-based global investment firm led by CEO Bruce Flatt, owns a majority of the 112.8-acre Pembroke Lakes Mall at 11401 Pines Boulevard. Two big-box stores at the mall are owned by Dillard's and JCPenney.

In recent years, both malls have seen widening vacancy rates fueled by an exodus of tenants, along with declining foot traffic that has eroded revenue. As a result, CMBS research firms like KBRA and Morningstar have issued warnings about Simon's and Brookfield's ability to land refinancing.

"Even if they were performing extremely well, I think it's going to be a challenge for any mall to get financing," Ben Jacobson of Boynton Beach-based Forman Capital told The Real Deal. "Malls have been out of favor for a long time. They're hard to trade and finance."

Spokespeople for Simon and Brookfield did not respond to requests for comment.

Maturing loans

Last year, Simon secured a one-year forbearance on a maturing $157.4 million CMBS loan that expires in February. Around the same time, Morningstar found that Miami International Mall's market value had nosedived 59 percent over the 10-year period ending in August of this year, plummeting to $159 million from $391 million in 2014, the report shows. As of March, the mall's vacancy stood at 22 percent due to a high rate of tenant departures, Morningstar found.

Meanwhile, Brookfield has a $260 million, interest-only loan secured by the 535,400-square-foot portion of Pembroke Lakes Mall it owns. That mortgage, which carries a fixed 3.6 percent interest rate, matures in March.

In late 2023, KBRA, the credit rating agency for the loan, downgraded the bonds backed by the $260 million debt. In a surveillance report, KBRA cited a "continued decline in operating performance" at Pembroke Lakes Mall. Morningstar also placed the loan on a watchlist, citing a decline in the mall's net cash flow, a spike in the loan-to-value ratio and the challenging lending climate.

The mall is 88 percent occupied, but multiple tenants renewed leases at lower rates than their originals, resulting in a 12 percent drop in net cash flow in 2023, KBRA found. The loan-to-value ratio also jumped to 142 percent from 125 percent year-over-year, the report found.

Two recent interest rate cuts—and possible future cuts by the Federal Reserve—are certainly more favorable for Simon and Brookfield, but both firms will find it difficult to secure new loans before the existing mortgages mature, said Daniel Llorente of Coral Gables-based KDM Financial.

"Given the size of these properties and the numbers we're looking at, you've got to give yourself at least six months to close," Llorente said. "That's still probably a pretty tight window."

Both owners have to show lenders that positive cash flow is increasing and that the loan-to-value ratio is decreasing, Llorente said. They should also be signing new tenants that convert the properties from strictly retail destinations into entertainment centers, he added.

"Some lenders are stronger believers in the retail market," Llorente said. "So the strong believer would have the vision of trusting a mall landlord that puts in a sports bar instead of renewing a shoe store."

Redevelopment is the best option

Simon and Brookfield will find it nearly impossible to refinance the CMBS loans without a future redevelopment plan, said Forman Capital's Jacobson.

"Malls in general have fallen more and more out of favor," he said. "Every single mall [financing] request we've seen is for transitioning the asset—whether it's completely demolishing it or breaking it up into new uses."

Indeed, owners of other struggling malls across South Florida are either partnering with or selling to residential developers. Keystone-Florida Holding Corporation, owner of Galleria Fort Lauderdale mall, is looking for a buyer willing to pay more than $100 million for the 800,000-square-foot indoor shopping center.

When the Fort Lauderdale mall hit the market in November of last year, the offering memorandum highlighted that the property is permitted for 1,899 residential units—60 units per acre—and buildings up to 150 feet tall. The brochure also noted that a new owner could develop a larger project through Florida's Live Local Act, as long as 40 percent of the new units are workforce housing.

In Hialeah, Dallas-based Centennial and Coral Gables-based Codina Partners are redeveloping a Sears store, an outparcel and a parking lot at Westland Mall into a mixed-use project with 815 apartments and 14 townhomes. Centennial, owner of Westland Mall, partnered with Codina to buy the Sears portion from Seritage Growth Properties for $16.5 million.

Electra America and BH Group are redeveloping Southland Mall in Cutler Bay into Southplace City Center, a $1 billion mixed-use project that will add 4,035 apartments, a hotel and medical office space around the existing retail center.

In Simon's case, the firm may not have to partner with another developer at Miami International Mall. In October, Doral-based Easton Group paid Seritage $17.1 million for a shuttered Sears store at the mall. Easton plans to redevelop the big-box space into a mixed-use complex with 450 to 500 apartments.

"The majority of people in real estate would agree that malls by themselves are not the highest and best use," Jacobson said. "You need to put apartments there."

Still, Simon and Brookfield are publicly traded institutional firms that can obtain more extensions from their lenders and buy more time, Jacobson said.

"You're talking about two behemoths, so they're going to be able to do things that most other people cannot," he said. "If they weren't who they are, it would be very tough. But long term, they have to figure out what to do."