The Evolution of Retail Part III: Regional Malls
Jeff Green and Jason Baker/Shopping Center Business

In this series, we’ve been addressing the challenges and successes of retail real estate and looking ahead at what the future may hold for different sectors. In the last article, we took an in-depth look at the evolution of the power center and how it must adapt to stay relevant as retail continues to change. In this article, we’ll be looking at the regional shopping mall, how it has fallen out of favor in development circles and how many are being re-engineered to adapt to new market realities.

Despite a 30-year string of predictions that the regional mall is headed for its imminent demise, this shopping format is likely not going away any time soon. That still doesn’t change the fact that many “fortress malls” were woefully overbuilt on an already crowded U.S. retail landscape, where some 1,400 of them still operate, according to the International Council of Shopping Centers. Nor does it soften the impact of online shopping, recession-inspired changes in consumer buying habits or the waves of open-air lifestyle centers, power centers and other retail prototypes that were constructed to directly compete with them.

A quick glance at what’s being built—and what isn’t—punctuates this ongoing saga.  Just one regional mall has been built in the U.S. in the last six years, the 700,000-square-foot City Creek Center that opened in downtown Salt Lake City in March, and the brunt of it was financed privately by The Church of Jesus Christ of Latter-day Saints. By contrast, development of outlet mall space has tripled since 2007 to 1.85 million square feet, according to CoStar Group, as brands seek space to cater to America’s nouveau value orientation and complement, though not directly compete, with their regional mall-based offerings.

Indeed, retail is evolving into a different animal. And once that transformation is complete, there will be fewer regional malls and super-regional malls remaining; 10 to 15 percent are destined for extinction, according to varying estimates.

Which fortresses will be left standing? Well, it’s a pretty safe bet that premium properties owned by the top retail REITs will survive the cut in a rich-getting-richer scenario. Through Aug. 1, in fact, regional mall REIT returns (25.11 percent) led the two other retail REIT subsectors, shopping centers (22.01 percent) and freestanding (18.24 percent) in year-to-date return on investment, according to NAREIT. That still leaves hundreds of other good regional malls that will survive once the wrecking ball dust settles.

But what constitutes a “good” mall?  Well-located real estate and strong demographics, though not necessarily age, are two prime factors. Malls such as the 47-year-old NorthPark Center in Dallas and the 42-year-old Houston Galleria continue to thrive because they’re strategically positioned in densely populated areas with enviably high household income ranges. Both have also been consistent in refreshing, upgrading and expanding their products over the years to protect their positions, and have also had the good fortune to not watch their upscale demographic disappear.

Not all centers have that luxury. Take, for example, another well-located Houston property, Greenspoint Mall, which opened in 1976 as a regional sensation in the northern sector of the market. Slowly, over the years, residents have fled the area as crime has increased, and two other newer area malls moved in to take their shoppers. But it was the opening of the Woodlands Mall in 1994 that seemed to cement Greenspoint’s diminished stature, despite its easily accessible location on a stretch of Interstate 45 that’s among the most heavily traveled highways in the U.S.

Sometimes, the downward spiral of a regional mall starts when one or more large anchor tenants, who typically own their real estate in the mall, stop reinvesting in their spaces. This commonly happens when their operating covenants, which run from 20 to 25 years in most cases, start to expire, as is now occurring at dozens of malls around the country. When the anchors finally do depart, it makes leasing specialty shop space exponentially harder, of course, and that downward slide becomes even more slippery. Add this trend to the departures of such anchors as Gottschalks, Mervyn’s, Circuit City and even Borders over the past decade, then factor in the fallout of a few other well-known struggling national anchors, and you have some profound leasing challenges.

Some regional malls have had success filling anchor vacancies with such former power center occupants as Dick’s Sporting Goods, Bed Bath & Beyond and even supermarkets and warehouse clubs. Or, they have divvied the spaces among expanding specialty retailers or cafe operators, giving them strong exterior frontage while re-appropriating the space’s rear square footage for additional inline shops.

Other regional malls, particularly those in waning trade areas or smaller cities, require more creative thinking. Some have been repurposed into medical centers, including the entirety of Jackson Mall, which was reincarnated as Jackson Medical Mall Thad Cochran Center, and Nashville’s 100 Oaks Mall, which was partially transformed into physician offices for Vanderbilt University Medical Center. Other malls have brought in residences, colleges, offices, hotels, libraries, police stations, courthouses, churches, aquariums, drivers license bureaus, sports training facilities, banks, gyms, museums and car showrooms, among other unconventional occupants. Some of these efforts have resulted in the creation of their city’s “new downtown,” sporting the same type of tenant mix you’d find in the nation’s old downtowns or some of the early, enclosed regional malls built in the 1950’s.

While these are different businesses, it doesn’t mean they can’t be synergistic with remaining retail tenants. Yet many developers, even in high vacancy regional malls, remain alarmingly hesitant to re-tenant and re-purpose their centers, oblivious to the fact that other centers are thriving in a mixed-use environment—and the possibilities that their properties may fall into that future 10 to 15 percent abyss as a result.

As a whole though, the regional mall remains a very efficient channel of retail distribution with a compelling economic structure. After hitting bottom in late 2008, sales-per-square-foot averages have steadily increased. Rents and occupancies at Class A malls are rising again with some fundamental improvements also apparent at secondary properties, which are suddenly becoming attractive to expanding tenants who can’t find or afford the scant new retail spaces. Enclosed malls are “in” again—and still weatherproof. Moreover, the developers who originally built them chose their sites based on broad trade area draws which the industry has since come to call “critical mass” or “Main and Main.”

Regional malls, it appears, will continue to be places of culture, community and convenience. Add a little developer creativity to the mix and you have a success formula that may endure for another 60 years.

In the fourth and final article of our series, we will look at the evolution of the neighborhood c   enter. We’ll take a look at what the future holds for these “convenience” centers and their necessity-based tenant mixes and what other types of developments can learn from them.

Jeff Green is president and CEO of Phoenix-based Jeff Green Partners, a leading consultant in retail real estate feasibility, retail expansion planning, medical retail planning, location analysis and commercial land use. He can be reached by email at jgreen@jeffgreenpartners.com.

Jason S. Baker is an X Team International partner and co-founder and principal of Houston-based Baker Katz, a full-service commercial real estate brokerage firm specializing in first-class retail tenant representation, project development and leasing and investment sales. He can be reached by email at jbaker@bakerkatz.com.