A Blog by Jonathan Low


Feb 20, 2021

Why Turning Shopping Malls Into Theme Parks Utterly Failed

They were very expensive to build and were never that attractive to consumers or financially significant when the 'only' problem was competing with ecommerce. 

Then the pandemic hit. Entertainment debt is now contributing to malls' financial woes. JL

Esther Fung reports in the Wall Street Journal:

Adding theme-park-like attractions was a strategy viewed as crucial to drawing foot traffic and reversing the yearslong struggles of mall operators battling online shopping. Now, the strategy looks like a millstone. Several hundred malls now feature entertainment that consumers can’t replicate at home. Even as new pandemic measures allowed malls' stores to reopen, regulations have kept entertainment attractions closed. Entertainment typically draws foot traffic, but has become an unsustainable expense. Among mall loans, 14% of $50.6 billion were delinquent at the end of 2020

Destiny USA is New York’s largest shopping mall, a six-story structure by Onondaga Lake. Its feature attraction is WonderWorks, a 40,000-square-foot theme park where children can experience a simulated earthquake, learn about space travel wearing an astronaut suit or play laser tag.

They could, that is, until the state made the mall close many of the attractions in November for the second time last year to counter Covid-19. Only 18% of the space leased to entertainment tenants is open currently, said a spokesman for the mall’s owner, Pyramid Management Cos.

Adding theme-park-like attractions was a strategy that Pyramid viewed as crucial to drawing foot traffic and reversing the yearslong struggles of mall operators battling online shopping. Now, the strategy looks less like a lifeline and more like a millstone.

Even as new pandemic measures have allowed the mall’s stores to reopen, regulations have kept many of its entertainment attractions closed. Pyramid, which is privately held, borrowed heavily to expand and to build entertainment extravaganzas at Destiny USA and another mall, Palisades Center in West Nyack, N.Y., and the bills are coming due. In April, the Pyramid entities that operate the two malls became delinquent on securitized debt called commercial mortgage-backed securities, or CMBS, according to real-estate-data provider Trepp LLC, eventually negotiating extensions and deferrals.

It’s a plight facing another privately held major mall owner that bet on on-site entertainment, Triple Five Group. It owns Mall of America in Minnesota and a New Jersey mall, American Dream, that have invested heavily in attractions from giant waterslides to an indoor ski slope.

Pyramid and Triple Five have gone much further than other mall owners in adding grand spectacles to their biggest U.S. properties, racking up debt they are now having trouble repaying. Last year, three of their four big U.S. malls defaulted on some CMBS debt, according to Trepp; the fourth mall is delinquent on some local-government bills.

No SaleQuarterly vacancy rates in U.S. mallsSource: REIS Moody’s AnalyticsNote: 4Q 2020 is preliminary.

Among all CMBS mall loans that ratings firm DBRS Morningstar tracks, about 14% of $50.6 billion were delinquent at the end of 2020, up from 2.7% at 2019’s end.

Entertainment typically draws foot traffic, but today it has become an unsustainable expense, said Nick Egelanian, president of retail-consulting firm SiteWorks. “This is one of the great dilemmas,” he said. “You think about all the things we’re experimenting with to take the place of the department store anchor, entertainment is the most expensive. Anything that requires mass gatherings isn’t a good idea during a pandemic.”

These burdens will become benefits again after the pandemic, Mr. Egelanian said, assuming vaccines are effective and something akin to normal life can resume.

Pyramid and Triple Five have more payments coming due this year without a clear idea of how long Covid-19 restrictions will affect revenue. A Triple Five spokesperson didn’t respond to requests for comment.

Pyramid Chief Executive Stephen J. Congel said he is confident Destiny USA will make it through. During the summer, he said, when Destiny USA reopened, traffic was as high as 80% of its year-ago numbers, as overworked parents and bored children streamed through its doors.

They will again, he said, after the vaccine becomes widely available. “That segment has been hit hard,” he said of the entertainment business. “But it will eventually return to be healthy.”

While many factors, such as retailer bankruptcies and competition from nearby properties can contribute to a mall’s default, analysts said, owners that borrowed to build entertainment attractions are more vulnerable in the pandemic. Still, they said, lenders are less inclined to foreclose on malls with large-scale entertainment venues because taking the keys back means taking on the complexities of running such a center or finding another buyer.

The pain goes further at Pyramid, which owns 14 malls: Entities that operate 11 of those malls, including the big two, missed repayments starting April on $1.2 billion of their $1.6 billion in CMBS debt, according to Trepp. Destiny USA defaulted on $430 million and Palisades Center on $418.5 million.

Pyramid negotiated extensions and deferrals with its lenders and resumed making payments in November, according to Trepp. Pyramid said its remaining three malls aren’t in default.

“These difficulties are very consistent with the entire mall industry,” a Pyramid spokesman said. “We expect to work out financial restructurings, as needed, as we have done so successfully in the past.”

Mall malaise

Malls have been staples of suburban life since the 1950s, but big department stores and retailers started closing outlets as consumers shifted toward shopping online and at independent stores, and spending on experiences instead of goods. Of the roughly 1,500 U.S. properties that were once enclosed shopping malls, at least 500 no longer are, said Ellen Dunham-Jones, a Georgia Institute of Technology professor who studies the retrofitting of dying malls.

‘We’re concerned about the survivability of the business here,’ says Nicole Montgomery, manager of Destiny USA’s WonderWorks.


Mall operators began looking to experiential games and rides to woo foot traffic and help cure the mall malaise. Several hundred malls now feature a few attractions—minigolf, karting, bowling lanes, gaming arcades—that consumers can’t replicate at home.

For most malls, these attractions are a small piece of business: Entertainment tenants occupy about 2% of U.S. mall space, according to CoStar Group, a provider of commercial-real-estate data and analytics.

Pyramid and Triple Five have bet more. About 12.5% of Destiny USA’s square footage is entertainment attractions and about 12.2% of Palisades Center’s, said the Pyramid spokesman. Pyramid’s other 12 malls are in smaller markets and have entertainment square footage ranging from 3.8% to 18.1%, he said.

When American Dream opened in 2019, Triple Five said it would feature 55% entertainment. It said that year that Mall of America in Bloomington, Minn., which opened in 1992, has 25% entertainment, including roller coasters and a giant sea aquarium.

Mall of America’s roller-coaster rides closed in March, reopened in August, closed again on Nov 21 and reopened on Jan 11.

Triple Five missed multiple Mall of America mortgage payments on its $1.4 billion loan last year. After negotiations with its lenders, the loan was modified and it secured interest-only repayment terms until maturity and is deemed current since December, according to Trepp.

Triple Five’s American Dream, in East Rutherford, N.J., across the Hudson River from Manhattan, became one of the first U.S. malls to devote more space to entertainment, restaurants and theme-park rides than to traditional retail when the $5.7 billion project opened—the costliest U.S. mall ever, analysts said.

Attractions include a 1,000-foot-long indoor ski slope and it planned to open a giant indoor wave pool in March but closed that month under pandemic restrictions. The mall partially reopened in October; two-thirds of its stores are operating, its website says. The water park, Nickelodeon theme park, minigolf and the ice skating rink are open. Other attractions have yet to open even for a day, because they are either still under renovation or are waiting for more people to get the vaccines. Other attractions that haven't opened include the aquarium, Legoland and mirror maze.

Triple Five is on the hook for $2.7 billion in loans, including through municipal bonds, for the mall, according to municipal-market information provider Electronic Municipal Market Access. The Journal couldn’t determine whether Triple Five was delinquent on any payments on that debt; the firm didn’t take out any CMBS for American Dream.

American Dream is delinquent on payments of $1 million in 2019 and $2 million in 2020 in a payment-in-lieu-of-taxes deal with East Rutherford, said Anthony Bianchi, the borough’s chief financial officer. Triple Five, of Edmonton, Alberta, also operates a mall in Canada.

Mr. Congel’s father co-founded Pyramid in 1968 as a Syracuse construction company. It built its first mall, in New York, in 1971 and by 1976 had completed 22. In 1990, it opened a mall on a former scrapyard, naming it Carousel Center for the merry-go-round that was the main feature. In 2012, Pyramid expanded it by 883,000 square feet to its current 2.4 million, renaming it Destiny USA.

To help fill the space and woo traffic, it added experiences typical of amusement parks: indoor go-kart operation, the WonderWorks theme park including a ropes course. Destiny USA’s foot traffic in 2012 rose by more than a third, and sales per square foot were 25% over the prior year, Pyramid said.

Destiny USA, which also added laser tag, a mirror maze, bowling and simulated rides, became a tourist attraction. Shoppers from Buffalo, N.Y., and Canada drove hours to experience it. “People were curious to see what it would be like,” said Frank Cerio, who grew up nearby and is chief operating officer of 5 Wits, which runs interactive and fantasy games at Destiny USA and other Pyramid malls.

Pyramid began offering day passes for access to entertainment sites at Destiny USA and developed a 209-room Embassy Suites hotel nearby. Girl Scouts held sleepovers at WonderWorks. Pyramid spent hundreds of millions bringing on more entertainment attractions to Destiny USA and other properties, Mr. Congel said.

The mall’s net operating income rose 16.7% from 2010 through the first quarter of 2014, according to a Standard & Poor’s report in 2014. But Destiny USA suffered declining net operating income every year after 2016, and Pyramid’s Palisades Center has also experienced declining income since 2017, according to Standard & Poor’s.

FootfallDestiny USA foot traffic, change from yearearlierSource: Placer.AiNote: Destiny USA was closed between late Marchand early July.

A Pyramid spokesman said: “While Pyramid has not been immune to the past decade’s fluctuation trends, which were exacerbated by the pandemic, we have confidence in the long-term outlook, based on our diversification strategy.”

Covid effect

When New York state implemented shutdowns in March, Destiny USA closed. Tenants struggled to pay rents and Pyramid became delinquent on the repayment of its mortgages for Destiny USA and Palisades Center starting April. Pyramid secured deferrals on debt service payments and delayed the maturity dates for the loans.

“We’re concerned about the survivability of the business here,” said Nicole Montgomery, general manager of WonderWorks at Destiny USA, referring to the theme park’s operations.

Destiny USA is now around 70% occupied, down from as high as 97% in 2013, said the spokesman. A J.C. Penney store shut in October, Lord & Taylor closed there in December as part of its bankruptcy and Best Buy said it is closing its Destiny USA store in March. Macy’s and TJ Maxx stores are still there, men’s apparel maker Untuckit said it is in talks about opening there, and Women’s clothing retailer Anthropologie said it is opening a store this year.

Depending on each tenant’s sales and circumstances, Destiny USA said, the mall has agreed to consider granting rent reductions.

One afternoon in December, yellow tape cordoned off the mall’s arcades, shutters were down on a laser-tag area and a peek inside Dave & Buster’s sports bar and videogame rooms revealed mostly darkness. The arcades and Dave & Buster’s remain closed.

Adam Liu, a 22-year old Syracuse University student, stopped by Destiny USA but said he wasn’t taking chances with the ropes course, the only part of WonderWorks open that day. “Not today,” he said, “because of the pandemic.”


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