Turning malls into mixed-use centers requires a new value calculation
We have all read the articles and seen the headlines: Malls Are Dying, Mall-pocalypse and other similar coverage forecasting the looming extinction the American mall. While these dire predictions might veer a little too often into hyperbole, they do describe a very real phenomenon. Malls are struggling. Online retailers have been steadily nibbling away at brick-and-mortar market share, and large department store dinosaurs have struggled to adapt to an evolving consumer marketplace.
Some malls are failing. Many more are underperforming. But malls as a category are not dying–far from it. Category A malls will continue to flourish, and many/most B malls still have great real estate fundamentals going for them: they typically occupy valuable and desirable real estate, with coveted locations frequently positioned near major transportation hubs. There is a very real opportunity to turn around an underperforming mall by redeveloping it into a new mixed-use destination.
But transforming an old or underperforming mall into a vibrant mixed-use destination isn’t easy. Retail alone might no longer be the highest and best use in the reconfigured project. There are often complex design and development challenges, as well as economic, demographic and leasing considerations that need to be accounted for. New value calculations must be applied to how the various moving parts produce success in a given project.
Here are some of the most important issues to consider:
Every mall-to-mixed-use transformation begins with a detailed market analysis, with the goal of determining what new uses and tenants will be added, based on market needs. Just because you recognize the potential value of a mixed-use environment does not relieve you of the need to be thoughtful and strategic in how to go about it. It is extraordinarily risky to simply throw something at the wall and see what sticks. A mall redevelopment often requires a significant investment, and you cannot risk getting it wrong.
In addition to localized specifics (including demographics, psychographics and a void analysis to identify potential opportunities), it’s also important to appreciate the broader development landscape in the market.
In Springdale, Ohio, just outside of Cincinnati, the Tri-County Mall is undergoing a transformation that will include repurposing one of the vacant anchor stores attached to the mall. In a market that lacks various concepts, there are a number of ways to turn the empty building into something useful, whether that’s a fitness facility or for medical use. This will include right-sizing the retail component and building on with components that are proven to attract shoppers.
Being flexible and creative when bringing in new tenants and new uses can help fill some of the gaps that open up when a department store or other large anchor goes away. Fitness concepts, medical uses, and even call centers are all candidates to occupy larger spaces. Medical services is a segment that is particularly hot. Demographic demand for the product is there, and it’s often a natural fit for landlords looking for new tenant types–as well as for healthcare providers looking to better service patients by locating medical services outside of traditional hospitals and healthcare campuses.
One thing to note is that medical doesn’t necessarily create the on-site commercial and social synergies that come with restaurants, entertainment uses and other service retailers. This is a big part of why dining and entertainment concepts are especially popular and powerful pieces of the mixed-use puzzle. The restaurant segment is exploding with new and creative concepts, and entertainment tenants like cinemas, Dave & Busters-style food and gaming concepts, children’s entertainment brands and even rock climbing centers.
Not many commercial real estate professionals have the capacity, capability, and creativity to successfully execute complicated and challenging projects like these. Most have a clear specialty and tend to operate primarily within that sphere. Those with experience in this specialized space tend to be opportunistic and creative–even visionary. Mall owners would be wise to either partner with someone who does have that demonstrated experience, or to utilize a larger team of separate organizations to handle the disparate components of a mall transformation in a coordinated and cohesive manner.
With regard to the financial calculus behind these projects, something to consider is that because such a major reconfiguration can be quite cost-intensive, partial or complete tear-downs can make more sense in some cases. To make the numbers work, it might be necessary to sell off some of the anchor parcels. This achieves the twin goals of helping to right-size the mall and help fund the redevelopment.
The cost to reconfigure or build the space out to accommodate some new uses/tenants, might not justify the rent the tenant can generate – at least on paper. But, at the end of the day, the leasing agent’s job will be significantly easier if they can provide prospective tenants with concrete evidence that they are breathing new mixed-use life into the property. It’s a kind of leasing loss-leader: attracting a higher quality tenant can pay off in a big way. This requires looking at the value calculation through a more holistic, long-term lens. If you can do that, while executing a strategic and sophisticated redevelopment plan, you can transform a floundering mall and achieve sustained success in a vigorous, vibrant and dynamic new mixed-use space.
Stephanie Skrbin, a principal at Avison Young, is recognized as one of the top retail brokers in Southern California. She has successfully completed transactions in excess of $500 million during her career.