With its lonely hallways, half-shut food court and out-of-order restrooms, the River Oaks Center mall in suburban Chicago seems like an unlikely place to make money.
But that is exactly what two little-known, family-owned investment firms — Namdar Realty Group and Mason Asset Management — are doing here and across the country.
With about 100 malls from New York to Utah now under their ownership, the two funds have climbed quietly from anonymity to being among the country's top-twenty mall landlords — thanks in large part to an aggressive low-investment business strategy at many of the distressed malls they have acquired over the past five years.
The approach has been aided by a slew of retail bankruptcies, and the fast-changing consumer tastes in favor of e-commerce firms such as Amazon, offering these two investment firms brick-and-mortar assets at bargain prices.
About half the malls Namdar and Mason have acquired are similar to River Oaks: properties with relatively low sales, sometimes in need of redevelopment and typically located in underdeveloped neighborhoods. More recently, the rest of their mall mix has consisted of healthier, but not high-end, properties as the funds have been trying to improve the quality of their assets.
A source with direct knowledge of Mason and Namdar's strategy said the funds invest as little as possible on many of their properties, adding the aim is to hold the assets, not redevelop them.
The approach is not without its detractors, namely mall tenants and some government officials who were hoping to see more investment in their malls once Namdar and Mason took control of the property. But in locations like River Oaks, that investment has not come.
"There has definitely been a decline in traffic," said Vickie Bass, manager of the Ashley Stewart clothing store at the mall.
In interviews with Reuters, Namdar and Mason said the upkeep was adequate and that they do not flip malls, preferring to hold onto them. On occasion, they have sold their least-profitable properties to redevelopers.
"When you own 100 retail properties, of course you're going to have people having complaints ... if there are issues, we deal with them," Namdar President Igal Namdar said. "We have a very high retention rate for our tenants, which shows us we are doing a good job."
The low rent Namdar and Mason ask for — sometimes only a couple of thousand dollars a month — has helped keep down vacancies at their malls, according to store managers and sources familiar with Mason and Namdar's strategy.
In order to improve the caliber of their tenants and portfolio, Namdar and Mason told Reuters that they have increasingly been buying healthier malls.
"We now want better quality assets, malls that are occupied, with healthy ratios and diverse tenants," Igal Namdar said.
Igal Namdar, 48, and his wife's cousin, Elliot Nassim, 36, the respective founders of Namdar and Mason, said they developed their investment strategy after they started buying malls together in 2012.
Namdar, who got his start in real estate using money from his family's jewelry business, said he clinched his first mall deal that year with Nassim by acquiring Desoto Square Mall for $24.6 million from Simon Property Group Inc, after it defaulted on a $62 million loan.
A key aspect of Namdar and Mason's strategy is snapping up malls at very low prices. Namdar and Mason told Reuters they have spent an average of $15 million to $20 million to acquire retail properties in the past three years, a fraction of what many of the malls cost to develop.
According to real estate data firm Trepp, Namdar and Mason bought 22 properties that were being sold in bankruptcy auctions between the start of 2015 and the end of 2017, paying an average of $5.3 million for each mall. This reflects a 92 percent discount to the value of the malls when they secured their loans, according to Reuters calculations.
Namdar and Mason typically spend 20 to 50 cents per square foot on maintenance. This compares to an average of about 60 cents per square foot that US mall owners spent on mall upkeep in the first quarter of 2018 among malls that reported square feet for the period, according to National Council of Real Estate Investment Fiduciaries.
Namdar and Mason have spent so little on the malls they have acquired, they often yield a 10 to 16 percent capitalization rate, a gauge of the investment's rate of return, according to real estate services firm Cushman & Wakefield's head of capital markets Mark Gilbert.
This tops last year's average US mall capitalization rate of 5.4 percent, and even the 9 percent rate mall owners enjoyed on average in their 1990s heyday, according to real estate research firm GreenStreet.
But Mason and Namdar's high-return strategy comes at the risk of friction with local officials, retailers and shoppers.
"Over time, you do become what you're perceived. I think that in many respects if they don't define what they're going to do with these malls in general, then they may get defined by the bad ones," Gilbert said.