MichiganRetail Fighting off the mallpocalypse February 26, 2018 Share on Facebook Share on Twitter Share on LinkedIn Share via email In 2017, a new report released by Credit Suisse gave voice to the fears that retailers and real estate professionals have been murmuring about for quite some time. According to the report, approximately 20 percent to 25 percent of all American malls will be shuttered inside of five years. What is remarkable is the fact that, as dramatic as that conclusion might seem, it might be a conservative estimate. Even more concerning is what that report does not go into detail about: the potential economic fallout of this mall “die off,” and what the extent of the impact could be—not only on the commercial real estate landscape, but on the national and international economy. These days, we are hearing the term Mallpocalypse being used more often. Whether or not that expression is intended to be tongue-in-cheek, it certainly hints at how industry professionals, as well as retail analysts and observers, see this as a very significant and potentially damaging issue. While it might sound like a hyperbole, it is troubling to visit even many malls that are considered to be healthy, strong performers and see a tremendous amount of vacancy “hiding” behind temporary walls or “coming soon” wall wraps. Northbrook Court in Northbrook, Illinois, for example, sits right in the middle of a big pocket of wealth with favorable demographics. But mall traffic has dropped precipitously. The fact of the matter is, people’s purchasing habits have changed—and they are continuing to change. And, for America’s malls, the situation is going to get worse before it gets better. There are millions of square feet of malls in every state—in virtually every county—that are either failing or are in a precarious financial position. If the current downward spiral continues and the floodgates open to a spike in mall closings, that could be the push that sends the economy over the edge and into the next downturn. Enclosed malls are the bread and butter for lots of companies, and, consequently, some of the most successful and prominent real estate organizations have experienced multiple layoffs over the last few years. This all might sound grim, but a realistic understanding of the scope of the problem is an important prerequisite to appreciating the scale of the solution. Most Class-A malls are so well located and designed that they will not only weather the storm, but perhaps even benefit from it—with likely greater demand and rent growth. At the other end of the spectrum are struggling malls that are so poorly located and designed that nothing can be done to save them. The middle is where the majority of malls sit—and, logically, where the preponderance of creative reuse and redevelopment opportunities exist. With that in mind, the need to find creative, effective and sustainable ways to redevelop malls that can be saved has become more urgent than ever. Whether it’s replacing or repurposing a failing property, revitalizing an underperforming mall, or redeveloping a center that could successfully be updated, augmented or reconfigured, creating a new mixof uses is often the best way forward. Forward-thinking industry professionals are bringing in new and appealing dining and entertainment concepts, and they are also finding new ways to turn malls into either hybrid or true mixed-use developments—incorporating multi-family, office, hospitality and other uses. Mall owners, operators and developers understand that landscaping and exterior improvements can help. But aesthetics and improved curb appeal can only go so far. Commercial real estate professionals are increasingly recognizing that the missing piece of the puzzle is the experience. Introducing mixed-use elements that provide that experience can elevate a purely commercial/transactional environment into a place that benefits from the synergies of a mixed-use commercial engine. The trick, of course, is making that happen. It isn’t always easy, and it’s rarely inexpensive. Malls are inward-facing, and are not always configured in a way that makes mixed-use renovation or redevelopment logistically or financially viable. And the challenges associated with a large-scale redevelopment are not limited to design considerations. Limited resources (too much debt and/or insufficient equity), restrictive loan covenants, reciprocal easement agreements, zoning issues and the inexperience, inability or unwillingness of some lenders to execute. Given that array of potential obstacles, and the inherent complexities of such large and challenging projects, it’s critically important that municipalities are realistic with respect to goals and expectations. Some communities could arguably have missed the boat on opportunities for their troubled malls—due to their relatively narrow goals and their inability to reconcile what they wanted to see as opposed to what would work. Community leaders need to listen to the market and to heed the counsel of developers who have experience in this specialized and sometimes problematic market segment. Special state and federal incentives may need to be part of the equation to make the numbers work for some projects. The full redevelopment burden should not be exclusively on the shoulders of lenders and developers, either. Give the community impact of these unique properties, this is fundamentally a public-private problem that may need a public-private partnership to solve it. Ultimately, many properties will live or die based on the capacity of the local community’s ability to recognize the challenge(s) ahead and boldly act on opportunities—instead of pointing to outdated zoning ordinances or simply hoping for unrealistic economic outcomes. Oftentimes, a true mixed-use transformation involves reutilizing land—either re-using or redeveloping part of the building, or tearing down part of the existing mall to make room for hotel or multifamily (given the relatively large parcel sizes and unique building configurations, the potential exists at some sites for creative residential options with unique features). With a modified tear-down or redevelopment, the goal is to keep some of the mall intact and create an environment that provides more of a dense, urban mixed-use atmosphere—moving closer to the live/work/play ideal that characterizes the best mixed-use opportunities. The tenant mix is going to continue to evolve, as well. We will see more medical office and other services, with an emphasis on restaurants, cinemas and entertainment concepts—especially those that occupy larger spaces. Topgolf and iFLY indoor skydiving have both moved into mall spaces (or mall-adjacent spaces) in recent months. Flex/industrial is in demand, and also makes good sense for some sites. Creativity and flexibility will necessarily be part of many mall transformations. Office and corporate spaces are part of that range of solutions. In Dearborn, Michigan, for example, 1,800 Ford employees now occupy the former Lord & Taylor space in the Fairlane Town Center. Storage units and educational institutions may also make sense for some malls. Developers will need to be both thoughtful and strategic. Every property is different, and effective mixed-use transformations are far from a cookie-cutter solution. We are going to continue to learn more about what works and what doesn’t work in the years ahead—and industry professionals need to be paying very close attention. Some malls are going to fail. It’s inevitable. And, in the long run, it’s good thing for the industry: the equivalent of a national retailer periodically trimming underperforming locations from its portfolio. But that process has to be a controlled descent, not a runaway train. The dollar value of these failing malls is in the hundreds of billions of dollars. If the dominos begin to topple, they have the potential to initiate a snowball effect that could lead to the next recession. But a large percentage of malls—especially the A and B properties—are located on some of the nation’s most valuable and desirable commercial real estate. That is both an asset and an opportunity. For malls that can use mixed-use principles to forge a new way forward, the future may be a lot brighter than today’s grim headlines would suggest. Michael Kalil serves as COO for Southfield, Michigan-based Farbman Group. Bill Bubniak and Ron Goldstone both serve as executive vice presidents for the company.