- January 1, 2018: Vol. 5, Number 1

What next for dead malls: There are new uses for defunct shopping centers that can benefit investors and real estate developers

by Sheila Hopkins

It is no secret that the retail sector is being buffeted by headwinds, crosswinds and, on occasion, tailwinds. The result is easily seen in the headlines, with at least 19 major retailers — including such iconic names as The Limited, Payless, RadioShack and Toys R Us — filing for bankruptcy protection in 2017.

When anchor retailers fail, malls that house them are also in danger of failing. However, unlike the retailers, who only need to remove a sign, lock the door and walk away, the owners of a failing mall property are left holding a large, chunky, now non-income-producing asset. What’s an owner to do? There really are only two alternatives: adapt or die.


Online shopping has been given much of the blame for the failure of brick-and-mortar retailers to thrive. U.S. online sales are expected to reach more than $459 billion in 2017, according to Forrester Research. That translates to 12.9 percent of the projected $3.56 trillion in total retail sales. Forrester estimates that online shopping will account for 17 percent of all retail sales by 2022. Those retailers that are succeeding, however, are not seeing online shopping as a challenge. They are seeing it as an opportunity to reach buyers outside of their footfall area. It is a way to expand sales, rather than lose sales.

Malls, too, are looking to adapt to the changing landscape, but they are facing several challenges in addition to consumers moving to clicks rather than bricks. There are about 1,100 enclosed malls in the United States, but a quarter of them may well close over the next five years, according to estimates from Credit Suisse.

Today’s malls are partly a victim of their own success. Developers saw the popularity of malls in the 1970s and 1980s and did what developers do — build. In 2016, the United States had 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia, the next two countries with the most retail space per capita, and 2.5 square feet in Europe, according to Morningstar Credit Ratings. The United States simply has too much retail, and there is not enough demand to support all the malls currently in business.

Demographics and changing tastes are also affecting malls. Consumers, whether millennials or baby boomers, are now much more likely to spend their disposable income on experiences, food and entertainment than things. These changing shopping trends were reflected in the 50 percent decline in visits to malls between 2010 and 2013, according to Cushman & Wakefield.

When there is an online choice for more efficient shopping, when there are too many retail outlets in a region, and when tastes are moving toward experiential activities, consumers will drive by the less attractive mall to the one across town with better parking, better amenities and better tenant mix. A mall that might have been able to survive one disrupter will very often succumb to the multiple forces rocking the sector.

“Problematic ones are the outlier malls that are in tertiary markets,” says Mary Ann Cate, a senior real estate manager. “Traditional anchor stores and national retailers are pulling out of these markets as they reduce their number of stores nationwide. There just isn’t enough business for them to remain open as a mall. In the end, all the value might be in the land, and then it is what is the highest and best use for that land.”

As malls begin to struggle, they not only need creative solutions, they need an infusion of capital to implement those creative solutions, as well as modernizing tired buildings so they conform to today’s trends.

“This is a challenging environment for even the A mall owners, who are investing heavily to engage with the consumer in a deeper way with a mix of creative technologies, as well as changing the tenant mix to bring in more experiential tenants, such as chef driven restaurants, as an example,” says Susan Swanezy, partner at Hodes Weill & Associates. “But this takes capital, talent and resources that are tough to justify for B and C malls.”

So what happens when a mall begins to spiral down? Those trying to turn things around are looking for new ways to bring in customers, as well as additional revenue. Many are becoming mixed-use assets by joint venturing with developers and managers to convert excess land and parking lots to multifamily or hospitality. Others are adding major entertainment features, as well as amenities, such as valet parking and spas.

“For some malls, losing an anchor tenant could be a good thing,” explains Swanezy. “These tenants usually have clauses in their contracts that restrict the types of businesses that can operate in the mall. When they leave, the landlord is free to lease to nontraditional occupiers, such as fitness, workspace and medical uses.”

At this point, mall operators are still trying to retain the retail focus of the asset.

“As mall owners add nontraditional occupiers to the space, they are looking for the right combination to maximize revenue,” says Rick Kalvoda, senior executive vice president at Altus Group. “You don’t want 100 percent gym or non-retail use, but you want something to drive foot traffic.”

Eventually, owners are faced with a decision — do we go or do we stay? Enclosed malls are typically owned by retail REITs, whose sole purpose is to own, manage and harvest returns from retail assets. That gives them a strong incentive to try to save the mall. So, they typically start by changing the tenant mix. Restaurants and entertainment will be added. Movie theaters have been a staple of malls, but many now use their atriums and central cores to present plays, concerts and other events that bring consumers into the building. Often, however, it’s just not enough.

“If a mall is going to fail, there is no reason to try and keep the asset as retail,” says David Birdsall, co-founder and president of 360 Property Partners. “Some of these things just aren’t retail any more. The sooner you come to that reality, the sooner you will be on the path toward recovery. It’s like being an addict. As soon as you acknowledge that you are no longer retail you can figure out what you should be.”

When mall owners come to this decision, they usually put the mall up for sale rather than trying to repurpose it themselves.

“A lot of the public REITs are very focused on traditional retail and trying to think outside the box is sometimes a bridge too far,” says Birdsall. “They would rather get rid of the problem child than be forced to deal with it.”


Once a mall is no longer suitable for retail use, other possibilities open up. Many of these structures are finding new life as distribution or warehouse facilities.

“These properties are often good for industrial because their locations tend to be advantageous for distribution, especially for online sales,” says Cate. “They are simply changing from point of sale to point of distribution.”

Other malls have become parks, data centers, farmers’ markets, college campuses, churches, office buildings, medical facilities, town halls, multifamily developments — including student and seniors housing — just about anything that can fit in a large, empty space. How this decision gets made can be complicated.

“A failing mall can be like a hot potato,” says Merrie Frankel, founder and president of Minerva Realty Consultants. “Whomever is holding the keys in the end gets to decide on its future use. Sometimes that is the original mall owner alone or working with another real estate owner experienced in adding non-retail uses. It could be a bank, which would normally look to sell immediately or after the property is stabilized, or possibly the CMBS special servicer [if the property is in a CMBS deal and has reached that point]. Sometimes the property is sold at auction; other times prospective buyers approach the owner before the keys are handed back. There are a myriad of alternatives depending upon the tenant base, highest and best use, location, and competitors, as well as the ability of the original owner to reposition, repurpose or dispose.”

One of the key aspects of repurposing involves getting community buy in.

“Developers must have a keen sense of macro trends affecting demand for commercial space to be ahead of the curve when radically changing a property’s use, such as from an empty mall to a data or distribution center,” says Holly Neber, CEO of AEI Consultants.

If there are legacy environmental issues, which can happen with large mall centers that were previously home to auto servicing and dealerships, or asbestos abatement costs, the math needs to make sense.

“The timeframe of these projects can often be quite extended due to all the stakeholders involved,” continues Neber. “However, it is gratifying to see how a community can be transformed by a site that is re-activated the right way. We love the creativity going on in this space. A site in Atlanta that was recently converted to movie studio use is a great example.”

So, where does the financing come from for these conversions? The same places that any development capital comes from.

“Banks, CMBS and life insurance companies still find these types of properties attractive, whether being repositioned into a completely different product type, or into a new wave of retail centers,” says Patrick Ward, founder and president of mortgage banking firm MetroGroup Realty Finance. “The repositioning or ‘value-add’ transaction is requiring at least 35 percent equity combined with a sound repositioning plan by an experienced operator.”

Operators who can meet the financing requirements can find the repositioning very rewarding.

“Rents at traditional malls in danger of foreclosure tend to be very low,” continues Ward. “Therefore, converting these assets into alternative uses can prove highly lucrative. The challenge, however, is properly structuring the capital.”

Although some malls end up in a different asset class, or even razed completely, others are still recognizable as malls, just in a different mixed use or entertainment-heavy skin. Retail has always adapted to changes in consumer tastes. Today is no different.

“Is the mall dead? No,” says Swanezy. “Is the old mall dead? Yes.”

Sheila Hopkins is a freelance writer based in Myrtle Beach, S.C.

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