Development Magazine Summer 2011

Development - Ownership

Reviving the Dead: Old Malls Find Life with New Uses

Redeveloping old enclosed malls into a different type of retail or mixed-use facility has become more common. Alternative uses include open-air lifestyle centers or actual town centers that offer a mix of retail, residential, entertainment and office uses.

Turning a dead or dying mall into a vibrant new development that brings new life as well as a new form of gathering space to a community seems like the ultimate recycling achievement. By all accounts, however, transformation to new uses is an enormous challenge, for a variety of reasons.

Even if a defunct or dying mall is well located in a demographically and economically robust submarket and equally blessed with ample parking and easy ac­cess, that is only the first hurdle. Deep pockets and a long-term perspective are critical. Financing for existing properties may have become more plentiful this year, but acquisition and development financing is still dif­ficult to arrange. Moreover, most old malls may have met code requirements when they were built, but are unlikely to meet (or exceed) them now, particularly for alternate uses.

Developers/owners who have concentrated on either of­fice, retail, residential, medical or educational uses but not all of those together, would need to build or acquire the special skills required for long-term mixed-use de­velopment. While community support for repositioning a blighted development might seem to be a no-brainer, no assumptions should be made; in fact, attaining community buy-in is an arduous but essential goal.

Just how deep is the universe of opportunity for those interested in meeting these challenges? That is not easy to determine. A few of the major retail property owners/developers have put more than three dozen malls around the country — which they consider to be lower on the quality spectrum — on the market this year. So, one company’s lower quality may be another company’s future treasure. Or for amusement, you can visit the gimlet-eyed Web site deadmalls.com for ideas.

But opportunities are not necessarily immediately apparent or plentiful. The ICSC depends on CoStar’s statistics regarding the number of malls (791 regional and 641 super-regional) in the United States, but has no data on how many have closed, are in foreclosure or have changed hands. The REIT research firm Green Street Advisors has estimated that because of low occupancy, low sales productivity or a combination, 10 percent of enclosed malls in the United States are set to fail or be transformed into another use. Cedrik Lachance, managing director of Green Street Advisors, said that of the malls for sale now, the majority will continue to be malls down the road despite poor NOI growth prospects.

Midstate Medical Services building

The Midstate medical office complex was converted from a former movie theater. The hospital client uses the lobby as a waiting area.

Distress in retail is apparent, though; recently REIS Inc. reported that malls’ vacancy rates jumped earlier this year to 9.1 percent, while rents stood at second-quarter 2006 levels. Moreover, REIS reported that regional malls showing increased vacancies tend to be those that have lost anchor department stores. But according to Ann Hambly, CEO of First Service Solu­tions (see Inside Finance column in this issue) retail is only at the relatively early stage of the decline/recovery process.

Alan Kahn, president of Columbia, S.C.-based Kahn Development said that “We’re now seeing a number of opportunities to re-use parts of regional mall facilities for second-generation large box retailers. Some of them are doing well and will expand.” With decades of expe­rience in office, retail and mixed-use development in the Southeast, Kahn Development has been assigned the task of reconfiguring a regional mall for a client. He remarked, “It’s exciting to have the opportunity. We’ve been looking at all alternative uses, but the best answer might be to bring in big boxes.” He pointed out, “I’ve frequently found that people don’t have a realistic sense of how much it costs to reconfigure and rebrand space.”

The Medical Model

Complete transformations from malls to other uses are still rare. As Cedrik Lachance observed, “We haven’t seen many examples; there’s more talk than actual action.” Far more common have been partial transformations, such as the former 100 Oaks Mall in Nashville where nearly half the redeveloped space was turned into clinical and operational support space for Vanderbilt University Medical Center; and the inclusion of Simon Fraser University Surrey’s campus in a nearly 600,000-square-foot office tower adjacent to the Central City Mall (formerly the Surrey Place Mall) in Surrey, British Columbia. Redeveloping old enclosed malls into a different type of retail or mixed-use facility has become more common too – turning them into open-air lifestyle centers or actual town centers that encourage pedestrian traffic and offer a mix of retail, residential, entertainment and possibly office uses.

Midstate Medical Services ambulance entrance

The project’s biggest retrofit challenge was the six- to eight-foot slope of the floor.

One company that is rapidly developing a niche in transforming old retail developments into medical offices is Denver-based Baceline Investments LLC. According to David Puchi, principal, the company’s experience with University Commons in South Bend, Indiana, got them started. This 100,000-squarefoot shopping center had 60,000 square feet of vacant space and was in foreclosure last year when the company acquired it for $18 a square foot. The initial business plan was to renovate it and look to release it to retailers. But it was located between two regional medical centers in South Bend and the company started hearing from doctors, who traveled past the location on their way to where they and many of their patients lived.

Baceline began working with a large medical group to lease the vacant space to the group, which ultimately bought the whole building. As retail tenants move out, the doctors will lease the space to other doctors. Puchi noted that the building appeals to the doctors because of convenience (location and parking) and less expensive occupancy costs. If the doctors were in a Class C building for $30 a square foot, he pointed out, it would be less desirable than a space designed specifically for their needs, at a 25 to 50 percent discount off of conventional lease rates. Moreover, “we don’t have a load factor,” he said.

Baceline then started looking for other opportunities similar to University Commons. Another find earlier this year was Fountain Village, a 37,000-square-foot retail development in DeSoto, Texas, a Dallas suburb. Baceline acquired the project from a special servicer for $1.2 million, or approximately 60 percent of the property’s original loan value. It was 25 percent occupied at the time of purchase. Baceline’s niche – looking for properties in the heartland that the large institutions overlook or are too small for them to focus on – is a competitive advantage for the moment. “I don’t know how long that’s going to last,” he said. “We’re seeing properties that we can acquire, basically, for the cost of land and we can do significant conversions.”

Baceline has been acquiring properties for all cash, but does approach lenders for capital for tenant improvements. “With a lease in place, it’s easier to talk to a lender,” he said.

Another company that has had suc­cess in turning old retail space into medical use is Avon, Connecticut-based Casle Corp., a design/build development firm. It has done three retail conversion projects: a movie theater building of 45,000 square feet was converted into a medical office complex (where the hospital client is keeping the lobby as a waiting area and where the six- to eight-foot slope of the floor was the biggest construction challenge to overcome); a former grocery store was turned into a primary care physicians office building of some 20,000 square feet; and a conversion of an 18,000-square-foot Blockbuster, a stand-alone building, for primary care.

Village Green Lamar Gateway shopping center

Village Green Lamar Gateway Shopping Center in Austin, Texas, was obtained by Baceline Investment at a 9.5 percent capitalization rate from a private investment group for $6.9 million.

David Sessions, president, said that “the difference between retail and office is not that significant. What’s different is the rent.” He noted that prior to the downturn, medical practices hadn’t been able to af­ford the location of large floorplate boxes.

Sessions believes, however, that smaller is better. “Medical offices don’t occupy large spaces,” he said. “It would be a struggle in a 200,000-square-foot building, with a ‘nest’ of tenants,” includ­ing running afoul of building codes dealing with exiting requirements. Physicians’ offices are typically independent businesses, he added, so “50,000 to 100,000 square feet for physicians is a lot of doc­tors’ offices.”

David Glover, design director of the architecture/design firm Gensler co-authored a white paper, “Re-Imag­ining Retail Centers” (available on the firm’s Web site), advocating that mall owners consider alterna­tive anchors, such as medical, educational, health/fitness, enter­tainment and libraries.

Gensler is involved with an effort to transform a severely underperform­ing three-level Burlington Coats store in Orange County, California, into a satellite facility for Hoag Hospital. Negotiations were still under way at press time but he remarked that “you can’t just sim­ply put a hospital in a department store space and say you’re done. You need to create a district — a health and wellness complex — around it, with a pharmacy, res­taurants that serve healthy foods, a maternity store. That’s what you’d want to do.”

Creating New Downtowns

PREIT, the Philadelphia-based REIT with a large portfolio of retail developments in the Mid-Atlantic, has been addressing the issue of what to do with challenged malls since the bottom of the economy in 2008, according to PREIT Services, LLC president Joe Coradino. The fundamental questions are: What is the economic environment in which the mall operates? Is there a major employer? What is the economic outlook going forward?

If the economic environment is healthy, the next question is: should improvement be a pure retail play? “The formula has a lot to do with local and regional tenants, which is not a bad thing,” he said. “Malls had become homogenized.

Now they’re starting to differentiate and feel like a part of the com­munity. If a pure retail play is not the solution, you turn to alternative uses or mixed-use solution.”

The 700,000-square-foot Voor­hees Town Center (formerly the Echelon Mall, opened in 1970) in Voorhees, New Jersey, is undergo­ing a three-year, $100 million transformation (internally financed) from an enclosed mall into a town center encompassing 450 residen­tial units, 67,000 square feet of office and a landscaped boulevard. In mid-May, the Voorhees City Hall moved to its new facility here, so it will truly be a new downtown for the community.

PREIT has incorporated alterna­tive uses, including medical and educational, into a number of its malls, but with medical and other uses comes a valuation issue, Cora­dino cautioned. “Rents are not as high as they are for retail tenants,” he said. “Non-retail tenants aren’t willing to pay CAM charges. It’s a different economic model. Where will valuation be as more malls begin to trade? We have not seen the answer to that yet.”

Belmar in Lakewood, Colo.

Belmar’s special events, a farmer’s market and other activities throughout the year enliven this new community gathering place in Lakewood, Colo.

Another new downtown, involving a public/private partnership be­tween the Lakewood Reinvestment Authority of Lakewood, a Denver suburb, and Denver-based develop­er Continuum Partners, is Belmar. Once known as the Villa Italia Mall, it had been the largest mall west of Chicago when it opened in 1966. The 106-acre development was failing by the late 1990s.

The first phase of the transforma­tion to Belmar (from what had been a 1.4 million-square-foot regional mall) will be a 3.5 million-square-foot pedestrian-oriented, downtown district, mixed-use development. When complete in 2017, the 22-square-block development will feature 200 homes and townhous­es, 1,300 apartments, nine acres of parks and plazas, and more than a million square feet of retail space.

Bob Murphy, mayor of Lakewood, said that the initial critical action was to create a community vision for the redevelopment. “You can’t skip that,” he said. Lakewood cre­ated a 30-member advisory com­mittee, which developed a list of goals and objectives. Summed up, the goal was to create a sustainable urban village. A critical part of the process was a two-week “camera exercise,” he explained, where committee members literally trav­eled around the area photographing things they liked and didn’t like. “That was a giant step forward for us,” Murphy said.

Lakewood’s partnership with Continuum Partners was sealed over a one-hour lunch, with scrib­bles on napkins and a handshake, he noted. “It was a bond of trust which continues today and that filters down to our staff and theirs. You need someone that shares the vision, has the financial capability and is in it for the long haul.”

Murphy stressed that while Belmar will be financially rewarding for Lakewood, “We didn’t go into this to make money. The goal was to revitalize the mall and prevent further decay.”

Lakewood uses all possible economic tools at its command, including tax increment financ­ing, tax waivers, property tax levies and public improvement fees from retail sales. He noted that this is an $850 million project, with $175 million in public improvements, of which the city’s contribution is $125 million through its various tools. Murphy also stressed, “We don’t encumber citizens with risk or debt. The risk is on the developer. We pay over time for funding of infrastructure. City taxpayers are not liable for anything.”

Street view of Belmar in Lakewood, Colo.

A public/private partnership is transforming a former regional mall in Lakewood, Colo., into a 3.5 million-square-foot, mixed-use development, scheduled for completion by 2017.

Belmar today reflects the original vision, but it has adapted over the years to changing market needs. One of the adaptations involved housing; while the partners envi­sioned that the development would appeal to Millennials, it has also proven popular with empty nest­ers, so additional residential was planned.

Murphy’s advice for prospective “new downtown” developers: “Create community buy-in. Focus on long-term value. Think big. Add a dash of art here and culture there. Understand the need to continually promote it. Make it the showpiece of the community with special events, farmers market, festivals. Hopefully you have a municipal culture that rewards creative risk-taking.”

The Professor’s Perspective

Ellen Dunham-Jones, professor of architecture at Georgia Institute of Technology and co-author, with June Williamson, of “Retrofitting Suburbia: Urban Design Solutions for Redesigning Suburbs,” has been studying ways to retrofit suburbia for more than 10 years. In that time she’s seen dead malls reposi­tioned with art spaces, nursing homes, universities, office space, schools, libraries and other forms of community gathering spaces.

The book was written during the boom years, she noted. Now she is seeing non-retail uses, such as art space, or organic gardening, that are used as placeholders until the economy recovers and redevelopment can be tackled.

“Before the crash everybody was looking for dead malls with scads of parking in prime locations,” she said. “Very few are really moving ahead now.” There are more plans to build on parking lots and leave malls intact, however, she pointed out.

She cautioned that in some cases where malls have died, the reasons why could frustrate new development. Regarding inauspicious demographics, she said, “If nothing has changed, probably nothing else will work.”

Dunham-Jones is a big proponent of transforming old retail centers into vibrant, sustainable, pedestrian-friendly new downtowns -- particularly if they are transit-oriented -- that can serve as a “third place,” as well as become an attractive residential alternative for Millennials and aging Baby Boomers.

Successful transformations are “all about public/ private partnerships,” she said. One silver lining in the cloud of economic recession is that “the public sector has had some breathing time and has become increasingly savvy about being a better partner,” she said. “They’ve targeted a lot of these sites, are eager to help and are in a better position than they were three years ago.”

For More Information

“Re-Imagining Retail Centers” by Gensler 
PREIT 
Belmar 
Baceline Investments, LLC  
Casle Corp. 

 

From the Archives: Development Ownership Articles from the Previous Issue

175-185 Wyman Street

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Contribution of Office, Industrial and Retail Development and Construction report cover

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