March 01, 2021

Article at Business Insider

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How to give America's dying malls the 2nd life they desperately need

A mall in Pennsylvanie demolished
Fairgrounds Square Mall in Muhlenberg Township, Pennsylvania. Portions of the mall are being demolished.
Ben Hasty/MediaNews Group/Reading Eagle via Getty Images

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  • American malls have faced bankruptcy as a result of growing online spending and the pandemic.
  • For decades, malls provided jobs and tax revenue and served as lifestyle centers for communities.
  • Mall real estate needs to evolve and a federal greyfield program is needed to assist communities with underutilized space and empty shopping centers.
  • Emil Skandul is an opinion writer on economic policy and is the founder of a digital innovation firm, Capitol Foundry.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit the Business section of Insider for more stories.

Even before the pandemic, malls in the US faced a doomed fate as more Americans dragged their purchases into digital shopping carts. Increasingly, malls lost major tenants as brick-and-mortar stores closed. Today, the dusty carousels and stock-still escalators of dozens of former malls serve as memorials to the peak of the consumer spending boom in the late 1990s and 2000s.

It's a growing national issue: the world of retail continues to see less in-store demand, accelerated by new patterns of consumer spending online. The surplus construction of malls and retail stores led to a bubble that ruptured in 2017, and now that demand for brick-and-mortar stores may remain depressed for years. For suburbs across the US, malls provided jobs and held up local economies, and the disuse of countless complexes paints a bleak picture.

As so many malls remain deserted or in disrepair and as the US retail vacancy rate hits a multi-decade high, the empty shopping centers that once boosted the US's consumer economy offer opportunity for new uses. There are scads of alternatives that regions can pursue to revive the shells of former malls into productive real estate for communities.

The decline of malls

For decades, malls in the US grew in popularity. Even while the rise of e-commerce and online retailers such as Amazon pushed back against the premise of malls in the late '90s, malls continued to be destinations for family weekend trips and teenagers passing time.

But the decline of America's malls, as prophesied by many, was inevitable. Unsurprisingly, in 2017 Credit Suisse predicted that one in four malls would shutter by 2022. Now, in our post-pandemic era, the number of malls closing will undoubtedly be higher.

Mall operators who are able to secure multiple big-name brands such as Nike, Sephora, Burberry, and Williams Sonoma have fared better than those who have had anchor tenants such as Macy's or JCPenney move out. A recent report from Green Street Advisors suggests 50% of department stores will vacate malls by this year.

But not all middle-market mall operators have underperformed. Ohio-based Cafaro Companies is the largest privately-held mall operator in the US with profitable malls in commuter towns in ten states.

"Suburban decay is the new buzzword," said Anthony Cafaro, Jr., a co-president of Cafaro whose grandfather pioneered the construction of shopping centers in the late 1940s. "But I don't subscribe to the idea that all malls will be obsolete."

Of more than forty shopping centers in their portfolio, only a handful have run into severe challenges as a result of a loss of anchor tenants in the past two years. A major part of their portfolio strategy has gone after mall multiuse, "outside-the-box" tactics, and developing broad connections to the community.

What comes next may not be a restart for retail complexes, but a reincarnation of the real estate of abandoned malls.

More than marketplaces

The economic development proposals for repurposing malls can be classified into two categories: public and private use. The most obvious private use for malls addresses America's housing crisis by turning malls into residences. Across the US, the housing supply has reached the lowest point in decades, and the public loan enterprise Freddie Mac estimates supply is short by 2.5 million units. Affordable housing for lower- and middle-income households is in the highest demand, but may be the most difficult to accomplish.

At the Spotsylvania Towne Centre in the bedroom community of Fredericksburg, Virginia, the Cafaro Company razed a Sears with plans to build a two-tower apartment complex adjacent to its more than one million square foot mall late this year.

Yet the zoning changes took several years and local members of the community were opposed, citing traffic and lower tax revenue compared to a commercial property. The housing addition was far from a significant revenue generator, but the company pursued the plan to create liveliness and activity within the complex.

If housing proves a struggle to achieve, either because of rehabilitation costs, building codes, or community pushback, mall conversions could instead advance growing industries in technology, health, hospitality, and entertainment.

A thoughtful redevelopment of malls as medical, fitness, or wellness centers, or even as a bio-laboratory may be possible. But if these solutions don't match local market demand, then storage, data centers, and fulfillment operations for existing retail customers could be better propositions for communities.

The keys to achieving a better outcome than before, says Mike Grella, a former head of Amazon's economic development division, are community-based development and the necessary political will. "Not unlike Amazon HQ2, if it's not done with community engagement you risk the project at the outset," Grella said.

In many communities, there's a strong case for why an abandoned Sears should become a school, community college, or vocational training center. In towns and cities that lack these facilities – it unquestionably should be. Although the prioritization of public use for adapted malls may be most compelling, it could be significantly more difficult than a private takeover.

The adaptive reuse of malls for civic utility creates the possibility to provide essential services or create shared community spaces such as a complex for libraries, art galleries, public pools, or indoor community sports. Communities could also consider incorporating town halls, convention centers, DMVs, churches, and homeless services — these municipal needs, which would require hefty public budgets, may be available at a discount in real estate acquisition costs.

Still, the costs for upgrades – everything from fire suppression systems to restroom requirements – may be steep. Communities and local officials may also be unwilling to accommodate new uses that aren't considered to be part of their township or city's master land use plans, a challenge the Cafaro Company recently encountered while trying to incorporate a church in a project plan.

The comeback of community and commerce

What's on the horizon for America's malls may still be retail or an experiential adaptation of it, like omni-channel retailing. But for mall operators facing nonpayment, reduced rent due to co-tenancy clauses, or tenant bankruptcy, digging out of these hardships could take years, making insolvency much more likely.

Complete conversions are the prudent alternative in situations where real estate is more of a liability than asset. The latent capacity of malls to become mixed-use properties is there, but it may be the case that the property isn't worth more than a '70s-era, asbestos-laden structure.

To tackle the complexity of the local blight that has emerged across the country will require coordinated efforts to rethink aging and underutilized malls. At the federal level, this could be the creation of a greyfield program to fast-track mall conversions or community acquisitions to vault over hurdles to local economic development. It could be modeled after the US Environmental Protection Agency's Brownfields Program that was designed to ensure timely redevelopment and technical assistance for the 450,000 contaminated brownfield sites around the country.

A mall reuse program would provide policy frameworks, recommendations for rezoning, economic and tax guidance and most importantly, federal grant support and tax credits to immediately counteract market shortcomings. It would incentivize planning and action in the pursuit of better uses for malls by private developers or help support the community acquisition and redevelopment for public use.

For now, unused retail may be perfectly suited for mass vaccinations and testing facilities. But if mall real estate is to make a comeback over the next few years, the approach to redevelopment will need to be reworked.

Hopefully, the redevelopment of malls will be done with partners that won't make the assumption that if something is built, people will come forever. It's with the understanding that real estate, commerce, and the needs of communities are constantly evolving, that suburban decay – a byproduct of processes marked by impasse, indecision, and delays – can be reversed.