Paula Gardner/MLive – Metro Detroit quietly stepped to the forefront of U.S. mall transformations early this year with a deal for a ¼-million square foot anchor tenant that won’t display the latest fashions, attract new customers or push sales per square foot.
Yet retail experts say that Ford Motor Company moving 2,100 employees into Fairlane Mall shows the type of creative leasing that should not only bolster the 1.4 million-square-foot Dearborn mall, but also set an example for shopping centers across the U.S. seeking new anchor tenants.
The reason: it comes at a time when top malls remain highly valued, yet the industry – which is worth hundreds of billions of dollars – feels increasing pressure over its largest retail spaces due to anchor store consolidation and store closings.
In the Fairlane case, the Ford office will fill both a long-closed Lord & Taylor store and small-tenant space.
“When you have a mall like that, it’s not the worst thing to have (a couple of thousand) more people coming into that location,” said Chris Brochert, a partner in Lormax Stern Devlopment Company in Bloomfield Hills.
Malls account for about 20 percent of retail sales in the U.S., according to the 2016 mall outlook report by Green Street Advisors.
It’s a big business: Green Street Advisors says destination retail centers in major markets drive most of the mall value in the nation. The value of the top five mall operators was estimated at $156 billion by the real estate research firm at the beginning of the year; publicly traded mall real estate investment trusts were valued at $112 billion.
Meanwhile, many mall REITS showed increased net operating income in early 2016, according to the International Council of Shopping Centers.
About 300 national malls are “A” quality, with strong demographics and tenant mix – and sales per square foot of $470 or higher. About 200 malls are at risk to close within the next several years, according to Green Street. That leaves 389 malls in the “B” grade, according to Green Street.
In the Metro Detroit market, 14 properties fit the retail definition of a mall, which typically denotes multiple stores under a shared roof with connected walkways; the properties tend to be located near population and transportation centers.
Across Michigan, there are about 50 top shopping centers, though some are “power centers” with connected big-box retailers and smaller outlots. Some of the largest malls outside of Metro Detroit include Rivertown Crossings in Grandville; Woodland Mall in Kentwood; and Genessee Valley Center in Flint.
In Metro Detroit, five “A” grade malls drive 74 percent of the mall value and generate sales of roughly $640 per square foot, according to Green Street. Seven additional properties are graded “B,” with two considered “C” or “D.”
“B” malls may have solid occupancy and sales of about $360 per square foot, but they’re also looking at limited options to replace their anchor if that becomes necessary.
“Strong anchors are imperative for the long-term viability of a mall,” according to Green Street. “However, traditional department stores are no longer the key traffic drivers of the mall given the business is in a secular decline.”
The sheer size of Detroit’s regional malls – which range from about 1- to 1.5 million square feet – add to the complexity. While most have healthy occupancy rates, they also face changing consumer patterns, including increases in online shopping and the draw to destinations that have more than retail options.
“Most major malls are overbuilt, meaning they can’t support the square-footage they have allocated to retail,” said Jeff Green, a national retail analyst based in Arizona and a Detroit-area native.
“Which is why they’re starting to look at nonretail uses being brought on the mall site.”
DEFINING NEW ANCHORS
The Starwood deal with Ford – which fills about 1/6 of Fairlane’s space with dedicated office space for a single tenant – was called an “excellent example” of new mall strategies by Green.
“That’s going to be a way for malls to survive, long-term,” Green said.
Southeast Michigan’s shopping centers so far are staving off the anchor store closings affecting hundreds of malls across the US.
But – recognizing that the climate for backfilling a large mall store vacancy poses limited retail options – many mall owners are moving to find new uses for the properties.
Strategies beyond turning to office conversions include:
• Using excess parking space: Briarwood Mall in Ann Arbor turned to its most-used entrance to build two restaurants in December 2014.
• Turning to typical outdoor ‘power center’ retailers: Macomb Mall’s new owners attracted Dick’s Sporting Goods to fill a former two-story anchor department store space.
• Adding entertainment components: Great Lakes Crossing Outlets added an aquarium early 2015, five years after it converted to an outlet format. And in early 2016, a Legoland Discovery Centre opened at the Auburn Hills mall, adding a 32,000-square-foot theme park next to the food court.
“I think it’s a genius move to put those kinds of uses in malls,” said Brochert.
After years of planning and months of construction, Sea Life Michigan aquarium is officially open to the public.
Each move to create a destination experience expands the uses and reach of the traditional malls, retail experts said.
“More and more people are looking into mixed use projects,” said Chuck Bechara of Starwood Realty Partners and director of leasing for Fairlane.
By approaching the traditional mall space as mixed-use redevelopment opportunities, Bechara said, mall owners are replicating the essence of a downtown, where multiple real estate functions coexist in a walkable setting.
Brochert agreed, saying the mall moves parallel some of what is seen in the downtown Detroit revival.
That the success of downtowns like Detroit is due in large part to milennials isn’t lost on the retail industry.
“There’s a fallacy that milennials don’t like the mall,” Green said. “That’s not really true.”
The demographic is a social one, Green said.
“They like being around others. What they don’t like,” he said, “is to not be entertained by the retailer that’s there. They need a little more stimulation from a retail environment.”
The Fairlane campus, with a movie theater, several restaurants and stores, should fulfill that for Ford’s employees who move to the mall, Bechara said.
“I think that’s one of the attributes and one of the key points and deciding factors (for Ford),” he said. “We already had a lot of the entertainment, shopping and restaurant components in place.”
However, converting to non-traditional anchors has to come with considerable thought, said AJ Weiner, managing director of Jones Lang LaSalle’s Metro Detroit office.
An office tenant, for example, likely won’t be on-site on weekends. That means the use “doesn’t really complement the other retailers in a traditional way by driving traffic, which anchors are designed to do.”
While Metro Detroit’s malls haven’t seen other examples of the size of Ford’s deal, Weinert said the number of jobs coming into the mall to fill the empty space may balance that out.
Nationally, examples of mall owners seeking to diversify the real estate uses on mall properties are increasing, with entertainment and gathering components high on the list, and offices still emerging. One example is in Nashville, where Vanderbilt University established medical offices in 40,000 square feet of Hundred Oaks Mall.
The most notable national mall change: some owners are now looking at housing.
In Monmouth, New Jersey, Kushner Companies sought to invest $500 million in the Monmouth Mall to expand its lifecycle to 24/7.
From NJ.com: “(The vision is for an) open-air hub that will have retail shops, dining and entertainment, along with a hotel and one – and two-bedroom apartment units. It will also have an outdoor plaza, green spaces and a streetscape.”
Renovations at Laguna Hills Mall in Orange County, Calif., include plans for the addition of 350 apartments by 2017. Arcade Providence in Rhode Island now has 48 micro-lofts.
While hotels are frequently built near southeast Michigan’s malls, housing is less common.
The Enclave community of apartments and condominiums was built starting in 1984 across a parking lot from Twelve Oaks Mall.
Housing is adjacent to Fairlane in the form of The Union, privately built student housing for the University of Michigan-Dearborn campus that opened a few years ago. UM-D was the last school in Michigan to have housing on or near campus, according to a 2012 report in the Dearborn Press & Guide. That $30 million project offers ‘by the bed’ leasing for 504 people.
“There is a lot of multifamily proposed for major malls around the country,” Green said. “Not a lot has been executed yet.
“But it’s a way of densifying the site … and probably putting the highest and best use on the piece of real estate.”
Bechara said Starwood plans to look at more development options for the Fairlane property, which has room to park 8,000 vehicles. The nearby student housing may inspire more residential uses there, he said.
“We’re still looking at that,” he said. “It’s something we’d probably be interested in doing.”
Mall closures in Metro Detroit aren’t likely. Experts say that Eastland Mall in Harper Woods, which moved into receivership in 2015, faces the most struggles.
Northland Mall in Southfield was demolished this spring, and the city – which paid $2.4 million for the property – now is seeking a developer for the land at Eight Mile and the Lodge. Summit Place in Waterford is closed and listed for sale.
On the other end of the spectrum is Somerset in Troy, followed by Twelve Oaks in Novi. Briarwood, in Ann Arbor, joins Green’s list of most-viable malls in southeast Michigan.
“Those three aren’t necessarily overbuilt for what they are,” Green said. “They’re such strong performers, any retail concept is going to look at going into Somerset first, or if not that, Twelve Oaks.”
Meanwhile, the Ford deal is changing more than the tenancy at Fairlane. Starwood bought it in 2014 from the Taubman company, the original developer, in a 7-property deal.
The company went in planning to build value for a likely eventual sale, Bechera said.
“Now we think we’ll keep it, and nurture and develop it,” he said. And the company – the seventh-largest mall owner in the US – will see if large office deals make sense it its other markets.
The lesson in the situation for mall owners, Bechera said, is that “you try to maximize the potential of the property. Sometimes it doesn’t work and maybe it doesn’t resonate with the market. … But I think there’s a high degree of success potential there.
“It’s worth the risk.”