Redeveloping the Mall: What Can the Market Support?

by Bruce Katz & Jeff Green

The regional malls of yesteryear are still with us, yet the relevance of many of them has faded. Anchored by traditional department stores that once held the customer captive with well presented, cutting-edge merchandise in a broad range of categories, the fortunes of many malls declined as their anchor stores lost their merchandising appeal and connection with customers.

Declining department store sales has led to department store company bankruptcies and mergers, creating empty anchor boxes in the malls. This has further stressed many malls, already suffering from their own lost connection with customers due to obsolete formats, outdated physical plants and not providing the convenience and amenities consumers are seeking. The result for many malls has been waning customer traffic, declining sales, vacancies, security issues and image problems.

These malls were built in the “build-it-and-they-will-come” era of mall development, when shopping choices were more limited. Today’s customers can – and do – choose between many other shopping options, including revitalized downtown shopping districts, new open-air lifestyle and entertainment centers, factory outlets, upscale community centers, discounters and big box “category killers” – not to mention the option of staying home and shopping online. A plethora of choices that offers what customers are demanding: convenience, a comfortable and aesthetically pleasing shopping experience and products that correspond to their lifestyle needs.

Yet while other shopping options continue to expand, new opportunities for older, declining mall properties are also emerging – because of fundamental qualities they still enjoy. Many of these enclosed regional properties occupy the best real estate in their markets, at the juncture of primary traffic arteries, with excellent access and visibility. Many of their markets – while perhaps transformed over the years – still reflect strong population and demographic characteristics. And the large-scale size of these properties – allowing the opportunity to assemble dominant retail selections with a regional reach – remains a key competitive advantage, assuming the right format and mix of uses can be applied.
Given these fundamental advantages, how can these aging malls be redeveloped to win back the patronage of today’s customers?

There is no shortage of ideas when it comes to redeveloping older, distressed properties, but how can owners/developers determine the best approach for a specific property? In this era of unlimited shopping choices, isn’t it safe to assume that a “redevelop-it-and-they-will-come” approach won’t work any better than “build-it-and-they-will-come”? Clearly, in today’s highly competitive environment, a comprehensive understanding of market dynamics and how those impact the property is an essential first step to redevelopment or repositioning.

Mixed use – the mix of retail and non-retail uses – is certainly an important trend in redevelopment. But how can owners/developers determine which uses are viable and what the optimum mix of uses should be for a given property? How can it be determined which retail uses, formats and specific stores would be supportable in a given trade area? For that matter, would the trade area change once the property is redeveloped, what would the new trade area be and who are the potential customers?

The mixing of different retail types and formats that were once segregated into different shopping center types is another key trend. Big box “power” retail is joining upscale lifestyle retail in some new and compelling combinations. Neighborhood center uses – such as grocery stores – are frequently showing up in repositioned malls as a way of increasing customer visits. Yet the optimal mix of these diverse retail types and formats greatly depends on the competitive situation, as well as on the area’s population, demographics and lifestyle characteristics. These factors are needed to determine if forecasted sales for these retailers would be sufficiently robust to support their inclusion in the redeveloped property.

Convenience needs to be one of the main considerations in planning retail properties, as customers have made abundantly clear. Though it is true that many older malls still have great regional access, it is also true that they’ve never been particularly convenient places to shop, at least by today’s standards. Developers are addressing this critical issue with a variety of ideas, including turning properties “inside out” to allow for close-in parking and clustering stores by category for more ease in shopping. But consideration must be given to how these choices affect the leasing and layout of the property. Here again, an understanding of the competitive situation is significant in the planning process.

Adding an entertainment component – movie theaters and restaurants – can be an effective means of increasing customer traffic, but whether it’s a panacea for what ails the center is another question. Would the costs associated with bringing in a movie theater produce the desired benefits? In addition to the question of financial returns, how could potential synergies with other businesses be maximized? What about possible non-financial costs, such as parking issues, changes to the center’s customer base and impact on tenant mix planning and layout?

As for restaurants, everyone seems to want PF Chang’s and The Cheesecake Factory – but not all markets can support them. Some centers would be better off with Olive Garden and Red Lobster, but that doesn’t make those centers any less viable for redevelopment. It’s all about knowing who your customers are and tenanting to what they’re looking for.

Another noteworthy trend is creating aesthetically pleasing environments – attractive community gathering-places. Adding amenities – such as landscaping, fountains and comfortable furniture – is part of the customer service equation, but which amenities would be most meaningful and provide the desired benefits? How do developers determine the optimum approach for a given community?

While all of these trends can represent valuable objectives in redeveloping a property, the optimum way of achieving them will vary from market to market, based on a host of demographic, economic and competitive variables.
Efforts towards revitalizing these properties should start with an understanding of the market situation, to evaluate the following factors:

– Population, areas of density and growth.

– Demographic and psychographic make-up of the customer base.

– Current – and future – competitive situation

– Current and future expenditure potential in the market.

This analysis will facilitate answering strategic questions, such as the following:

– How much retail space is supportable in the redeveloped center?

– Which retail categories are supportable?

– What specific retailers are supportable?

– What sales volumes can these retailers achieve?

– How much office or residential space might be supportable as part of the center?

– How might the redeveloped center be vulnerable to new competition and complement existing competition?

The answers to these questions have to do with an understanding of the market. The research and analysis involved in fully appreciating the market situation and its impact on the center is a key first step in any shopping center development process – including redevelopment. The importance of the results it produces can’t be overemphasized – not only for determining the size, mix, format, sales, look and feel of the center, but also for developing compelling (and quantifiable) tools that can be used effectively in leasing and marketing.

The malls of yesteryear are still with us and their future can be bright.

Bruce Katz is President of Retail Focus, Inc., a San Francisco-based retail and shopping center consultancy, specializing in tenant mix analysis. Jeff Green is President and CEO of Mill Valley, Calif.-based Jeff Green Partners, which provides sales forecasting services to real estate developers and retailers. Both firms have extensive experience in the repositioning of distressed shopping centers and in evaluating the feasibility for new shopping center development.