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Dec 4, 2017,09:19am EST
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The retail apocalypse has not been kind to malls. Credit Suisse recently studied the state of mall-based retail and predicted that that about one-fourth of the nation’s 1,100 shopping malls — or roughly 220 to 275 shopping centers — will close by 2022. This is largely credited to the shift toward online shopping, which the bank predicts to capture upwards of 35% of consumers’ spend by 2030 and the resulting raft of brick-and-mortar store closures, that will reach 8,600 this year and more are expected to follow next year.
The traditional concept of a mall as a grand hall for shopping is becoming “a historical anachronism” desperately in need of reinvention, says Rick Caruso, CEO of retail developer Caruso Affiliated, which is responsible for the trend-setting LA-based The Grove at Farmers Market that offers outdoor retail, food, and entertainment centers.
Mall owners aren’t sitting idly by though, as they push the traditional mall’s boundaries beyond retail to create community centers that become destinations where guests can meet, eat, be entertained, and shop, if they feel so inclined. The new buzz word in the mall industry is “reuse” or “remix” where old retail spaces are made over for new, more relevant uses for today’s consumer culture.
Shopping alone or shopping primarily can’t be the reason why people will come to the mall anymore. With big increasingly empty spaces, ample parking, and access to major thoroughfares, malls are now asking “what else can these locations be used for?” says Peter Muoio, chief economist at Ten-X.
Among the answers to that question are dining experiences, beyond the ubiquitous mall food court; hotels and other services, such as dry cleaners, salons and barber shops; fitness, with gyms, yoga, Pilates and other workouts centers; recreational activities for families, such as rock climbing, children’s activities, even indoor water parks and amusement parks; and medical care uses. But one of the more revolutionary and promising concepts is adding live/work alternatives.
“Residential housing is one of the several options that developers are considering in order to revitalize failing mall properties,” Rick Rizzuto, vice president at Transwestern reports. “In today’s landscape, some are redeveloping mall properties to include residential units, while others are considering condos and apartments.”
The need is great and growing for accessible, affordable housing
Market success hinges on finding a consumer need and meeting it. And that is what malls can do by adding residential into their mix.
Housing collocated in mall properties can capture growing demand from two of the key demographics looking for such accessible, convenient places to live: aging baby boomers and young millennials. The Harvard Joint Center for Housing reports that by 2035 more than one in five people in the U.S. will be aged 65 and older, and one in three households will be headed by someone in that age group.
“The housing implications of this surge in the older adult population are many,” says Chris Herbert, managing director at the center, “and call for innovative approaches to respond to growing need for housing that is affordable, accessible and linked to supportive services that will grow.”
Mall properties could be well suited to meet these needs. Further it may offer opportunities for mall owners to bring in new retail, like grocery and pharmacy, and new services including medical and senior care tenants.
Affordable and accessible housing is also in great demand among millennials which forward-looking malls could be repurposed to address as well. In its new State of the Nation’s Housing report, the Harvard Joint Center for Housing Studies says, “Looking at the decade ahead, as the members of the millennial generation move into their late 20s and early 30s, the demand for both rental housing and entry-level homeownership is set to soar. The most racially and ethnically diverse generation in the nation’s history, these young households will propel demand for a broad range of housing in cities, suburbs, and beyond.”
By adding residential into the mall mix, the commercial tenants will find a new captive audience for their goods and services. “One of the main benefits is that residents will have restaurants, services and retail at their front door step. The close proximity to these uses will allow the consumer to utilize these almost as amenities,” says Steven Henenfeld, senior vice president and director of retail leasing at CREC.
How malls are redefining “living over the shop”
By looking beyond conventional retail space, malls can untap tremendous value in those properties and become more relevant to their local communities. “While we’ve seen store closures increase in 2017, for the most part, malls are attracting new tenants through strategic marketing and property enhancements,” says Nick Hernandez, managing director of retail for Transwestern. “And in cases where a retail mall no longer makes sense, we have seen many owners successfully adapt to the changes in their trade areas by repurposing the mall for another use.”
Mall locations can be prime for residential uses. “Malls are typically located on or near an intersection of a high or a main street and are well served by public transportation,” Henenfeld notes. “That puts the residential properties at the center of town, allowing residents easy access to main roads and highway systems.”
But adding housing to an existing mall can be a challenging process. “Retail and housing require completely different skill sets. You are dealing with numerous individuals instead of fewer corporate clients. Leases are shorter and turnover tends to be higher for residential,” Muoio explains. “However, there’s an incredible demand for housing, especially in certain markets, so owners making this shift would be entering a growth arena.”
Among the complications for adding residential into the mall mix is the need to involve local governments in the process. “Changing the core use of the mall property creates a somewhat complicated process,” Jay Rollins, managing principal of JCR Capital explains. “It typically requires a partnership with local municipalities and other officials to obtain proper zoning and determine a site plan. While malls are generally well-suited for a transition into multifamily housing, many communities may find this process too complex of an undertaking.”
Often times adapting mall properties to include housing options requires demolishing existing structures and starting over, which means that a significant amount of new capital must be raised, Rollins notes. But adding residential to the mall may yield a high return on that investment, especially if the market demographics and consumer demand is great enough.
Further, mall developers can realize new revenue from less productive areas in the mall property itself. “With ample space, developers can build multifamily on the less desirable portion of the parcel, leaving prime main road frontage for the retailers that require exposure to the street,” Henenfeld says.
While the greater accessibility that residents will find in setting up house in a mall property, including restaurants, shops and services on their door steps, they can face negatives, not the least of which is being surrounded by commercial use spaces and the crowds they draw. “Restaurants create noise. Gyms play loud music, so soundproofing must be considered in the buildout of a space depending upon the use,” Henenfeld says.
But in the end, two huge demographic groups – baby boomers on one side and millennials on the other -– with equally strong demand for affordable, accessible housing is where struggling mall properties can find a new lease on life. And it may not only be a strategy for failing malls, but for still vibrant ones that are looking to become even more relevant and important destinations in their communities.
In planning for new uses of old mall spaces, developers need to keep the needs of each of their local communities clearly in mind. “Developers must be cognizant of the demographics of the residential component and cater to the on-site residential demographic as well as the surrounding market,” Henenfeld concludes.
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