Weathering a storm

With traditional retail juggernauts J.C. Penney, Macy’s and Sears all closing large numbers of stores across the country this year, times are tough in the shopping center business.

But the owner of the Riverchase Galleria, which contains all three of those department stores in anchor positions, remains optimistic about the 31-year-old mall’s future.

The Riverchase Galleria was spared from the closure lists of those three iconic companies, and the mall also has seen the expansion of Belk and addition of Von Maur department stores in recent years.

Annual sales at the Galleria dipped 1.6 percent — from $430 million in 2015 to $423 million in 2016 — but still are 13 percent higher than the $375 million total in 2011, tax records from the city of Hoover show.

And Alabama’s largest enclosed mall — with 1.5 million square feet of leasable retail space — is 98.5 percent occupied and has been for quite a while, said new General Manager Mike White.

“We’ve been really fortunate,” he said. “This is a class A retail property. It’s always going to thrive. We have such a great piece of real estate. It has such great access.”

The mall is at the intersection of Interstate 459 and the busy U.S. 31, and about 1.5 miles from Interstate 65.

The Galleria was built by the Montgomery-based Jim Wilson & Associates and opened in 1986 with four anchors — Parisian, Pizitz, Rich’s and J.C. Penney. Macy’s was added the following year, and Sears came in 1996.

Over the years, department stores consolidated, changed names and shifted to different spots in the mall, but the shopping center has remained a super-regional mall and significant tourist draw in the state.

Ownership changes

Jim Wilson & Associates sold half its ownership in the retail portion of the mall to the Chicago-based General Growth Properties in 2003 and turned over management of the property to General Growth, which officially became GGP in January.

In November, GGP bought out the other 50 percent of Jim Wilson & Associates’ ownership in the retail portion of the Galleria and paid off the loan on the property. However, at some point, GGP transferred 24 percent of its ownership to another partner in a deal that involved some other properties, said Kevin Berry, GGP’s senior vice president of investor and public relations.

Berry declined to name that partner, saying the information was confidential. He said the deal was part of a tax strategy for GGP.

Carl Bartlett, executive vice president for Jim Wilson & Associates, declined to give details about why the Montgomery-based company sold its interest in the shopping mall.

“There’s a time for everything,” he said. “It just made good sense for us.”

The Wilson family still owns 100 percent of the adjoining 17-story, 285,000-square-foot Galleria Tower office complex and has a small ownership in the adjoining Hyatt Regency Birmingham ‒ The Wynfrey Hotel, Bartlett said.

“We’re still very bullish on the area,” he said.

GGP paid $143.5 million for the 50 percent share in the mall, but that included enough to cover Jim Wilson & Associates’ $110.3 million share of the debt, so Jim Wilson & Associates walked away with about $33 million in cash, Berry said.

How much is the mall worth?

The value of the Galleria has fluctuated greatly in the past 11 years. When the owners secured a $305 million loan on the property in 2006, the mall was valued at $385 million, according to Trepp, a company that tracks securities backed by commercial mortgages.

In 2011, nearly two years after the official end of the Great Recession, the mall was appraised at $198 million after net cash flow fell from $20.6 million in 2006 to $17.9 million in 2010, according to Commercial Real Estate Direct (CRED), an organization that tracks real estate capital markets. That was only slightly more than needed to fully service its interest-only loan, CRED said.

Mall officials in 2011 announced a plan to spend at least $60 million to $90 million redeveloping the shopping center, including adding a Von Maur department store, renovating and rebranding The Wynfrey Hotel as the Hyatt Regency Birmingham ‒ The Wynfrey Hotel, and completing extensive renovations on the rest of the shopping center campus.

That same year, the city of Hoover offered an incentive deal that gave the mall owners a tax rebate equal to 50 percent of extra sales tax revenues, up to $25 million, generated on the Galleria campus after the bulk of the redevelopment project was completed. The rebate deal was good for 10 years.

By August 2014, mall owners had spent more than $65 million on redevelopment, including $18 million for the hotel, city officials said. 

Their investment spurred at least another $52 million in other renovations and construction by other companies on the Galleria campus, including $33.6 million for the new Von Maur department store, roughly $9 million for renovations at Belk and $5 million for the Earth Fare store, city officials said.

By the end of 2014, retail sales on the Galleria campus had increased 11 percent from $375 million to $416 million, city tax records show. Sales continued climbing in 2015 to $430 million before dropping slightly to $423 million in 2016, records show.

The $12.7 million paid in sales taxes to the city of Hoover in 2016 represented about 18 percent of the city’s overall sales taxes.

Tax rebates

The Galleria’s first year’s sales tax rebate was $609,033 for 2014. That climbed to $821,040 for 2015 and fell slightly to $719,691 for 2016.

In September 2016, a new appraisal valued the mall at $257 million, according to Trepp. The price GGP paid Jim Wilson & Associates indicated a value of more than $280 million.

That’s significantly less than the $385 million valuation in 2006, but 2006 was a weird time for commercial real estate loans, said Orest Mandzy, managing editor for Commercial Real Estate Direct.

“If you had a pulse, you could have gotten as much as you wanted,” Mandzy said. And GGP was good at maximizing its valuations, he said.

GGP and Jim Wilson & Associates were able to get their $305 million loan modified in 2012 — dividing it into a $215 million A-note and a $90 million B-note. When GGP paid off the loan in November, the A-note was paid in full, but shareholders in the B-note suffered an $86.7 million loss, Trepp reports show.

“That’s a pretty significant loss,” said Sean Barrie, a research analyst for Trepp. However, “we’ve seen much larger losses.”

The loss for investors doesn’t really say much about the health of the mall property itself, Barrie said. 

“By all accounts, the mall is doing well financially,” he said.

Mandzy agreed. There are a lot of poor malls out there, but “GGP is one of the good operators,” Mandzy said.

Seeing a mall with a Sears, Macy’s and J.C. Penney might cause some people to be concerned, but the health of a mall is typically determined by sales at inline stores, not at the anchors, Mandzy said.

With such a high occupancy rate, “I suspect this is a good property,” Mandzy said. “GGP is a very shrewd operator. They do what is in the best interests of their shareholders … They have to be optimistic on the property’s prospects. Otherwise, they wouldn’t have bought out their partner.”

The mall experience

White, the general manager, said the nature of shopping malls is changing, and GGP is adapting with the times.

People these days don’t go shopping just to get a piece of clothing or a particular item; they’re also looking to get a meal or for some type of entertainment, White said. The millennial generation in particular is looking for something to do, not just something to buy, he said.

GGP is looking to provide more of those type experiences in its retail properties, White said. 

“You want this place to ultimately be a multi-use facility that can serve a lot of needs.”

The perfect example is the Dave & Buster’s restaurant, arcade and sports bar planned to go in half of the 66,000-square-foot Galleria space now occupied by Forever 21. White said he expects Dave and Buster’s to be open by the summer of 2018.

Donovan Bradford, a 21-year-old from Trafford who was recently in the Galleria food court, said a Dave and Buster’s at the mall would be awesome. He already comes to the Galleria with his friends about four times a week, he said. They usually go to the arcade at Bumpernets, the food court or shop at Game Stop, Hot Topic, Aeropostale or one of the shoe stores, he said.

“It’s just a nice place to come and just hang out for however much time you need to kill,” he said.

Sara Gilbert, a 40-year-old who lives near Liberty Park, said she comes to the Galleria about once a week. She comes more to walk than to shop, but she does like to shop at stores such as The Walking Company, Victoria’s Secret and Macy’s. “I like to eat at Ruby Tuesday’s, too,” she said.

Gilbert said she loves the renovations the Galleria did in recent years, and she likes being able to do everything indoors.

“I can park one time, and I can eat, walk and shop before I ever have to leave the building,” she said.

Tenant changes

Joe Parker, 31, of McCalla said it seemed like the Galleria was struggling for a while, but it had a resurgence and filled back up with stores he likes, such as H&M and House of Hoops.

H&M filled the 25,000-square-foot spot vacated by The Limited near the end of last year.

More changes are coming. The Aldo shoe store closed, but the Bath & Body Works next door is expanding to fill that space, White said. Bath & Body Works has temporarily relocated near Belk during construction, he said. The City Gear shoes and apparel store also will be expanding, he said.

It’s natural for stores to come and go, but White said mall officials will do everything they can to keep the shopping center viable and current.

White, a former starting offensive lineman on the University of Alabama football team who played in the NFL, spent 11 years as a Navy Seal and served as the personal bodyguard for Bruce Springsteen and on the personal security team for Bill and Melinda Gates before getting into the commercial real estate business.

He spent seven years with AIG Baker as director of anchor leasing and was involved with the Patton Creek shopping center before he got back into the personal security business for a while, he said. Coming back to the commercial real estate business to manage the Galleria is like a dream come true for him, he said.

“My goal is to be here till I retire a long time from now,” White said. “If you want to really succeed, you have to adapt to your surroundings.”