The chief executive of Simon Property Group, a mall real estate investment trust widely seen as a survivor in a turbulent sector, has consistently brushed aside any suggestion that the traditional mall business is in trouble.

“We have refuted e-commerce taking the malls down,” David Simon said during his most recent conference call with analysts. “We have withstood Covid. Our business is strong, growing — in the enclosed mall business. In the enclosed mall business it's strong, yet we have naysayers out there that don’t believe it."

However, the company’s acquisition of a 50% stake in mixed-use developer Jamestown, announced last week, suggests that Simon may be coming to terms with the limits of having a portfolio dependent on enclosed malls, observers say. Simon Property Group didn’t immediately respond to a request to comment for this story.

The deal, whose terms were not disclosed, gives Simon “an opportunity to capitalize on the growing asset and investment management businesses with an experienced fund manager and mixed-use operator and developer, utilizing the Jamestown platform to accelerate Simon's future densification projects,” according to the companies’ press release.

Jamestown invests in and redevelops properties for varied uses including office, retail and residential. Its many projects include Ponce City in Atlanta, a redevelopment of a former Sears catalog facility; Ghirardelli Square in San Francisco; and Constitution Wharf in Boston. Jamestown boasts a high level of creativity and an opportunity for Simon to diversify, at a time when the math of running an enclosed retail-dominated mall doesn’t add up, according to Shlomo Chopp, managing partner at real estate advisory firm Case Property Services. 

“I think there's a place for malls, and I also think there's a challenge with regards to a lot of these boxes and anchors,” Chopp said by video conference. “You could argue whether Macy's is a great anchor or not, or J.C. Penney remains an anchor worthwhile to draw people, but at the end of the day it's a numbers game, right? Your whole gig all along was that you got a lot of people coming to the property. Now, you don’t.”

For REIT investors, diversification isn’t usually a plus, because investors want “pure bets,” according to Nick Egelanian, president of retail real estate consultancy SiteWorks. But though Simon Property Group has unloaded some of its enclosed malls, they remain a large part of its portfolio, he said.

“Simon needs diversification,” Egelanian said by phone. “They have to be able to demonstrate competency in something other than enclosed regional malls. It’s about time. They’ve built some open air centers, and they're okay. It’s not their core competency.”

Simon needs to rethink and revamp the department store-dependent malls that define its business, and that will take immense investment and a different kind of expertise, according to Egelanian. Simon owes much of its success to its size and power in the market, but that level of domination won’t solve the problem of how to reuse the cavernous space left by a departed anchor, which will take creativity and an investment of about $1 billion per mall on average, he said.

“So now Simon is partnering with a company that’s one of the most clever and nimble, which will allow them to actually be clever and nimble,” he said. “Because they're going to be in a different world — some of their malls will act like malls and some of them will act more like mixed centers. They'll go different ways, at different times, in different formats, but they'll happen, and this is the kind of expertise they need to do it.”