has lost one or more anchor tenants, the owner can choose to walk
away from the existing investment or try to adapt the space so it can
continue to be productive. From an owner’s or lender’s perspective,
walking away is rarely attractive. Thus, within the shopping mall
industry, the race is on to figure out the best way, if any, to adapt
There are many ideas for re-purposing malls but few perfect
answers. Some malls have simply tinkered with store and amenity
mix and added varied dining and entertainment options. One
advantage of these limited makeovers is that they do not require
substantial capital improvements, but their weakness is that they
don’t address the fundamental changes taking place in retail.
Other approaches look at bigger changes to the physical
mall environment or the kinds of businesses or services offered.
According to retail analyst Ray Hartjen of the advisory firm
RetailNext, options include incorporating non-retail activities,
such as community college spaces, houses of worship or fitness
facilities. Other possible new mall tenants include medical and
dental offices and clinics. Other suggestions include using existing
store space for “pop-up” public events or using a portion of a
mall’s space for farmers’ markets. In a different direction, some
analysts have advocated turning some or all of a mall’s space into
housing, while others advocate using mall spaces as fulfillment
centers for e-retailers.
One example of adaptive reuse is the Hickory Hollow Mall in
Antioch, TN. In 2011, the last of the mall’s two remaining department stores announced closings — within days of each other — and
by June 2012, the mall had shuttered. But it recently reopened under
a new name, Global Mall at the Crossings, and with a new strategy.
In addition to traditional mall stores, the center now contains a
satellite campus of Nashville State Community College, a library, a
recreation center and, perhaps most unusual of all, a practice rink
for Nashville’s NHL team.
Another example is The Arcade in Providence, RI, an indoor
mall modeled after European arcades. With its center city location,
The Arcade was unlike a traditional suburban property. But it had
fallen on hard times, and in 2012 it closed for two years of renovations. A dozen or so local shops — no chain stores — still occupy
the first floor, but the top two floors were completely gutted and
turned into microlofts — small one-bedroom apartments.
Not all attempts to readapt malls have succeeded. The Erieview
Mall in Cleveland, had a vaulted glass ceiling that admitted abundant natural light. When the mall’s shops began failing, its management turned parts of the mall into the greenhouse it resembled.
Starting in September 2010, herbs, salad greens and fruit were
grown hydroponically in the mall’s glass atrium, while old jewelry
stalls were repurposed as gardens on wheels. The project, Gardens
Under Glass, was lauded in the New York Times and National
Geographic. Yet Gardens Under Glass also illustrates the risks of
radical changes. The mall’s temperature-controlled indoor climate
proved to be a breeding ground for aphids. With poor yields and
management difficulties, the gardens were gone two years later.
Experimenting with mall formats is a process that has just
begun, and no single replacement model has emerged as the
dominant alternative. Given the wide gamut of communities that
malls serve, ranging from central urban locations to exurban and
rural sites, it is conceivable that no single format will emerge. But
there is one point that analysts agree on: change is coming soon,
particularly for the weaker B and C properties that make up the
lower tier of the U.S. shopping mall universe.
The Future & Consolidation
Although the stresses on the shopping center industry are clear,
analysts differ on how severe the impact will be. On the negative end, commentator Howard Davidowitz of Davidowitz &
Associates predicts half the 1,100 U.S. regional malls will close
over the next decade, while Credit Suisse has pegged the likely
closure total at 300 over the next five years, and Cowen believes
240 malls will need to close. Other analysts are more sanguine
about the long-term outlook. Despite the weariness in the market,
the notion that the end is nigh for brick-and-mortar retail is overstated, acccording to analysts at industry research firm Trepp,
which predicts e-commerce giants will slowly open physical stores
or showrooms and retail landlords will adapt to fill the space left
behind by big-box tenants.
Others see the weakness as an inherent condition of the market.
“Every conference I go to, they talk about a softening of the real
estate market in 2018, 2019,” said John D’Amico of Trimont Real
Estate Advisors. “That’s just the cycle. It’s about the right time. It
won’t be like 2008 to 2010, but there will be a softening.” Although
it recognized that some mall closings would occur, Cowen argued
at the same time that the problems in the shopping mall industry
are largely confined to class C and D malls, and that class A and
most class B malls will survive. Green Street Advisors has a similar
view, believing higher-end malls will continue to see growth in net
income, but primarily from renewing store leases at higher base
rents, rather than from increased percentage rent from tenants.
As a consequence, Green Street reports mall values for higher-end malls are holding steady, but values for B and C malls appear
to be softening. Green Street further notes that there has been a
“transaction void” in sales of lower-rated mall properties, a further
reflection of buyer concern.
So, while opinions differ about the extent of the problem, it’s
clear that the industry expects the next few years will be challenging, with an increase in loan defaults and further weakness
in the underlying retail sector. What is less clear is the optimal
solution to the continuing pressures. abfj
S TEPHEN SELBS T is chair of the Restructuring and Bankruptcy group
at Herrick Feinstein.
It is clear is there are many ideas for re-purposing malls,
but few perfect answers. Some malls have simply tinkered
with store and amenity mix and added varied dining and
entertainment options. One advantage of these limited
makeovers is that they do not require substantial capital
improvements, but their weakness is that they don’t
address the fundamental changes taking place in retail.