It was big news this past March when AiNet, a Beltsville-based data infrastructure company, purchased 300,000 square feet of space and established its CyberNAP communications center. A server farm, if you will.
A company that stores data in a huge building it uses as a server farm isn’t especially big news. But it is when that server farm is in a struggling shopping mall in what had been an anchor department store, Boscov’s, in space mall management had been unable to lease for two years.
In recent months, the depth of the struggles of Marley Station, which is located at the intersection of routes 2 and 100 in Glen Burnie, have become more pronounced; the mall is in foreclosure, its finances now being handled by a special servicer.
Just what will happen with the more than 1 million-square-foot property is a topic in the area of some discussion. If the owner of AiNet gets his way, Marley Station’s future use may be for something that no one imagined it would be when it was opened by Taubman Centers in 1987. Or even last year.
Plunge in Value
Marley Station’s financial issues center around a mortgage that was supposed to be paid off before July 1. The Indianapolis-based Simon Property Group, which owns the mall (as well as nearby Arundel Mills) knew that, given the drop in leasing at the mall to just 58% occupancy, that wouldn’t be happening.
“At that point, the mortgage was transferred to a special servicer [LNR], which indicates maturity default,” said Deepak Jain, president of AiNet, adding that the financiers already have taken a $58 million writedown. “So the mall is worth $58 million less than it was supposed to be worth, according to Simon’s books.”
So what might be the answer to the mall’s financial woes?
“We’re interested in buying the entire mall to support our customers,” said Jain. “I don’t think that a traditional real estate developer would find much of an opportunity to keep Marley Station operating as a retail mall or by repositioning it.”
Even if Simon considers that latter option, creating a mixed-use or multi-family property, there are many similar projects in the region that are struggling. “When their mortgages come due during the next several years, those companies that take such an option may find themselves in the same boat as Simon is with the retail project today.”
Jain used the for-instance of a 300,000-square-foot building in Hyattsville that is part of a mixed-used development called University Town Center. “It’s located 1 mile from the University of Maryland, College Park, and is just as close to two large retail properties, The Mall at Prince George’s and Prince George’s Plaza — and it’s going up for auction,” he said.
“That one building is being sold at public auction, which means that none of the other owners involved in University Town Center want to buy it,” he pointed out. “That’s a huge red flag.”
As for Howard and Anne Arundel counties, Jain feels they “are probably going to follow the above example during the next couple of years because of the state of the market for mixed-use projects.
“The situation in Hyattsville is a bad sign for anyone who is trying to do mixed-use projects across the country, because Washington, D.C., is one of the best areas to build in the U.S., due to the federal government being based here,” he said. “So if it’s not working here, where will it work?”
Joe McBride, a research analyst for Trepp LLC in New York, said that there were two outstanding loans on Marley Station: an interest-only loan of $114.4 million that has been in foreclosure since August, “and another that was resolved a year ago for a 113% loss,” he said. “All told, $17.5 million was the original balance, and it had dropped to $16.8 million.”
That’s due, in part, to occupancy issues that have plagued the mall. Last year, occupancy dropped from 80% in 2010 to 65%. Since, its down to 58%.
McBride said the genesis of the problem was that the mall’s original loan was originated “in the glory days of super-high evaluations,” he said. “In 2005, which was really after the glory days, the mall’s valuation was $178 million. Now it’s $65 million.”
As for Simon, the corporation has been tight-lipped about the mall’s issues. Spokesman Les Morris only mentioned that it’s company policy “not to comment on the financial situation of our properties,” only adding that it is “actively operating the property.”
As for LNR, the special servicer for Marley Station, spokesperson Bud Perrone took a similar stance, simply confirming the company’s role in Marley Station’s financial issues.
“LNR is servicing the loan on Marley Station for Simon, because it is our fiduciary responsibility to get the maximum return for the bondholders that became involved when the bank that previously held the loan on the mall sold it,” Perrone said, also declining additional comment.
Boom Years Leases
These types of issues are happening “not only in the retail, but in the office market as well,” said John Harrington, senior vice president and principal of the Lutherville office of MacKenzie Commercial Real Estate Services.
“There are many companies in the office market, for instance, that leased, bought or financed their spaces five-to-seven years ago, during better economic times,” Harrington said. “Today, however, businesses are not flourishing as they were and are often still consolidating and cutting back on employees.
“Likewise in retail,” he said. “Sales are off nationwide, so retailers are cutting inventory and employees due to declining sales. They leased these spaces during the boom years and rents were higher, but now they don’t have the sales to satisfy the costs of their leases.
And that brings the story back to when Simon financed the center.
“The income stream doesn’t support the mortgage,” said Harrington. “The regional malls, like The Mall in Columbia, Westfield Annapolis and Towson Town Center, are in stronger demographic areas than Marley Station is. And now it’s been standing in the long shadow of Arundel Mills” for more than a decade.
At AiNet, however, business is brisk. The company just won a 10-year contract worth up to $16 million with a large federal agency to provide data center services. If the entity’s servers are located in the former Boscov’s, they will require just 1% of the square footage in the building.
However, Jain said that such deals will be occurring with more frequency. That’s among the reasons that he feels his plan, unusual as it seems, is viable. So are the needs of AiNet’s customers after they become rooted within the company’s infrastructure.
“When a customer comes to a company like ours, their business needs do not usually decrease over time. That’s because the information technology needs of most concerns only increase,” he said. “That means using us saves them money, since we streamline their processes.”
Another point is that, since Marley Station was built as a mall, it has a whopping 5,000 parking spaces. “That number of spaces can support 2 million square feet of office space, so by current zoning standards, we’d be in great shape. Plus, we can build a garage, if needed.”
Jain already has the scenario playing out in his head: Three regular shifts, plus weekends, too. “Even if you just count on what services might be offered inside the mall building,” he said, “that would create a substantial economic impact in Glen Burnie and for Anne Arundel County.”