REIT's purchase of Del Almo Mall may let the air in.

The pending purchase of Del Amo Fashion Center by Mills Corp. for an estimated $440 million is likely to be followed by a wholesale renovation that could include opening up the 32-year-old enclosed center, according to real estate sources.

On top of the purchase price, the Arlington, Va.-based real estate investment trust could spend up to $150 million redeveloping the 3 million-square-foot property, which is second only to Bloomington, Minn.'s 4.2 million-square-foot Mall of America in retail square footage.

The sale by developer Torrance Co., which hadn't been announced late last week but was confirmed by numerous sources, marks the fourth in a series of major local mall acquisitions over the past year that, with the Del Amo deal, would total more than $1.1 billion.

Unlike the other three, however, the Torrance property is in need of substantial upgrading. The 160,000-square-foot north wing has been empty since anchor tenant Montgomery Ward filed for bankruptcy in 1997. The 222,000-square-foot northeast mall section is also empty.

In all, more than 481,000 square feet of Del Amo is vacant, according to Richard Rizika, senior vice president at CB Richard Ellis, who represented an unsuccessful bidder on the property.

Given Del Amo's challenges, Mills may follow the line of other local mall operators by turning at least part of the behemoth indoor complex into an outdoor shopping area.

Using the success of Santa Monica's Third Street Promenade and Old Pasadena as a model, Paseo Colorado and the Sherman Oaks Galleria have been converted to outdoor centers, while Whittier's Whittwood Mall, Carson's SouthBay Pavilion and Santa Monica Place are being considered for either total or partial outdoor conversions.

"Retailers want to be there because shoppers want to shop there," Mark McGaughey, first vice president at CB Richard Ellis, said of outdoor centers. McGaughey, who brokered the recent sales of both SouthBay Pavilion and Whittwood Mall, added that the expenses associated with an outdoor mall are as little as a quarter of those at enclosed malls -- mostly because of lower utility and insurance costs.

That makes uncovering enclosed malls "a very popular solution," said McGaughey.

Cash rich

The buying frenzy of the past year has been largely spurred by real estate investment trusts heavy on capital and light on alternatives for good yield investments. General Growth Properties Inc., Developers Diversified Realty Corp. and Westfield America Trust are among shopping center REITs that have either just made their first foray into the Southern California retail market or have added to their existing local portfolio.

Since July, Chicago-based General Growth, Beachwood, Ohio-based Developers Diversified and Santa Monica's Macerich Co. have purchased the Glendale Galleria, Pasadena's Paseo Colorado and The Oaks in Thousand Oaks, respectively. The biggest of the deals was the $415 million paid for the Galleria in November.

Westfield America bought its partner's 50 percent share of Fashion Square Sherman Oaks for $67 million.

REITs have benefited from an influx of capital stemming from investors favoring the perceived safety of real estate amid a stumbling stock market.

Since the beginning of 2002, the Morgan Stanley REIT Index is up almost 13 percent, versus a 15.4 percent drop for the Dow Jones Industrial Average.

Mall REITs have performed even better. Shares of Mills, General Growth and Developers Diversified have climbed by 37 percent. 61 percent and 56 percent since the beginning of last year.

"Real estate generally looks a lot better than equities and bonds, and the retail REIT s have been the best performing," said Chris Hoffmann, managing director of Eastdil Realty, who helped broker the Galleria deal. "When mall REITs are flush with cash, there's a signal to do something with it'

Last year, 41 malls were sold nationwide and 20 of them were bought by REIT's, according to Eastdil figures. In 2001, nine malls were sold and only one purchased by a REIT .

Deal pending

Changes at Del Amo are not likely to come until later in the year, when the Mills deal is slated to close.

In a May 5 filing with the Securities and Exchange Commission, Mills said it had "entered into an agreement to purchase an existing mall property in California for a purchase price exceeding $400 million" with a closing date "during or before the third quarter of 2003."

The filing did not identify the site, and Becky Sullivan, spokeswoman for Mills, would only refer to the filing when asked about Del Amo. She declined further comment.

Neither Guilford Glazer, principal at Torrance Co. whose personal worth has been estimated in excess of $800 million, nor officials from Goldman Sachs, which is marketing the site, returned calls.

In a May 5 research report, Smith Barney analyst Ross Nussbaum wrote, "We are aware that Mills had been looking at Del Amo Fashion Center and Great Mall of The Bay Area. Based upon conversations with mall industry contacts, we believe that it is Del Amo.

"This acquisition, if consummated, would be consistent with one of the three parts of Mills' corporate strategy -- acquiring and enhancing traditional regional malls," the Smith Barney report said.

"I think they picked their horse' said Rick Caruso, chief executive of Caruso Affiliated Holdings, referring to the seller. Caruso said he had bid on the property and estimated the purchase price at $430 million. "We had two different schemes to redevelop the property' he said. "It's a terrific piece of real estate, but it needs a lot of work:'

Caruso is the developer of the open-air Grove project in Los Angeles.