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Mall Makeovers, Big Box Availability Benefit Retail Growth

Looking Ahead: Is a Dying Mall a Good Thing? Retail Developers Think Out of the Big Box and Lure Shoppers with New Tech
July 4, 2018
The development of the Village at Totem Lake in Kirkland, Washington, is at the forefront of mall makeovers picking up across the country, transforming large, drab slabs of concrete into community centers.

To glimpse the future of retail development for the second half of 2018, look no further than the Village at Totem Lake in Kirkland, Washington.

The 45-year-old shopping mall will soon boast 850 luxury apartments, plazas with fountains, a pool, a gourmet grocer and a high-end movie theater.

The development is at the forefront of mall makeovers picking up across the country, transforming large, drab slabs of concrete into community centers. The phenomenon joins two other trends that will shape the retail sector for the rest of 2018 and beyond: developers seizing costly opportunities presented by closing big-box stores and brick-and-mortar retailers adopting eye-catching technologies to engage shoppers.

The Community Mall

For decades, some mall builders have called their projects town centers to reflect the gathering place that their developments represent. Now developers are upping the ante, more often trying to create entire communities by including retail and entertainment venues, offices and residential components in their projects. The Village at Totem Lake renovation won’t be complete until 2020, but it’s already spurring redevelopment in adjacent neighborhoods. The mall and a nearby development will add almost 2,000 multifamily units by 2020, putting it front and center of the community mall movement.

The country’s largest mall owner, Simon Property Group, is reinvesting in dozens of its 189 U.S. properties, adding open-air retailing, plazas, new entertainment options and, in some cases, hotels and office space.

Mall operators have "an incredible opportunity to do what I thought they should do for years, which is add density to their assets" with these spaces for various uses, said Suzanne Mulvee, director of research and senior strategist at CoStar Group. "They're smart to do it."

A 2017 Jones Lang LaSalle report on 90 significant mall renovations since 2014 found that the top spending priorities were food and fun, followed by physical upgrades and tenant improvements, and creating open spaces for community use.

Like The Village at Totem Lake, developers also added apartments to increase foot traffic. More than 40 percent of the malls added multi-family housing. One-third built a hotel.

"Malls have to become like a sightseeing tour, and entertainment accomplishes that," said Ron Waldbaum, vice president of retail brokerage Leibsohn & Co. in Bellevue, Washington. "People want to eat and get out of their apartment. What better place to go than downstairs to drink and shop or see a movie?"

Even dying malls offer redevelopment opportunities. A report by Credit Suisse predicted that as much as 25 percent of the approximately 1,200 malls across the country could close.

Developers are repurposing closed malls in places such as Phoenix, St. Louis and Baltimore by adding a mix of retail, restaurants, housing and office space.

Again, it's all about density and demographics. Renovated malls in commercially dense urban locations are thriving, said Spencer Levy, the Americas head of research for CBRE.

"Malls that are struggling, if they're in a strong demographic location, will do just fine, if they're reformatted to meet the new style of the market," he said.

Costly Big-Box Opportunities

The redevelopment of space occupied by ailing big-box stores presents another near-term opportunity that will play out later this year and beyond.

At the Tacoma Mall outside Seattle, for example, officials recently announced plans to raze a Sears store to make way for a luxury movie theater.

As of May, 95 million square feet of space had come online in 2018 as a result of announced store closings, according to CoStar research. That's just a little less than the 105 million square feet for the entire year of 2017. With more store closings anticipated, that number will keep climbing through the next six months. Forecasters say it's unclear whether the next six months will exceed the first half.

Even so, it's still not a perfect situation. While developers across the country are already scrambling to take advantage of empty or soon-to-be vacant big-box stores, many of those properties are in poor condition, said Brad Umansky, president of Progressive Real Estate Partners in Rancho Cucamonga, California.

In Progressive’s Los Angeles Inland Empire submarket, several former big-box stores not in malls sit vacant as developers ponder their options.

"It can be very challenging to take a vacant K-Mart, Toys "R" Us or Sears building and figure out how to replace them," Umansky said. "It could be location, an antiquated building or ugly facades. Maybe it needs to be torn down. It all takes a lot of time and money."

At the same time, Umansky predicted developers would increasingly "use their talents" to renovate buildings, but it could come at the expense of ground-up development.

Many may have to be reformatted into smaller footprints.

"It's pretty hard to turn these boxes into something else," Mulvee said. "But when you can find a use case that fits, it is a lot cheaper than ground-up construction."

The Case for Display

The visual perception of merchandising is growing more important by the month. Large brick-and-mortar retailers in particular are becoming ever more aggressive in their use of technology to woo shoppers in the face of increasing competition from online retailers and each other.

Following along the lines of Target Corp., retailers are rapidly expanding in-store digital offerings to give shoppers a more entertaining, personal experience. The Minneapolis-based retailer, which operates 1,829 U.S. stores, recently opened an internal "test store" full of flashy digital displays and products.

Just last week, The Container Store opened its first "next generation" store in Dallas. It features 18 digital screens and interactive design tools that allow customers to upload photos and videos of their organizational challenges. The Coppell, Texas-based company will use the new store as a test model before rolling out the concept to other locations.

This varied marketing will increasingly give brick-and-mortar retailers a competitive advantage.

"Static displays no longer work," said Scott Bowles, general manager of Provo Town Center Mall in Provo, Utah. "Retail has to become like a second cell phone."

For the second half of 2018, more retailers will boost the flash in shopping or face getting left behind: "Retailers that electronically engage their customers will be the trend-setters for the next five or 10 years," Bowles said. "Those who refuse will die."

Editor's note: This is the second in a series on the outlook for commercial real estate for the rest of 2018. Links to the other articles in this series are listed below.

MULTIFAMILY OUTLOOK: Multifamily Investors Are Getting Used to 'Normal'

OFFICE OUTLOOK: Office Landlords Expect More Deals as Shared-Workspace Companies Grab Space

COMMERCIAL CONSTRUCTION OUTLOOK: Commercial Construction Surges as Demand Counters Higher Labor, Materials Costs

INDUSTRIAL OUTLOOK: Retailers, Logistics Firms to Drive Industrial Property Demand in Coming Months

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