Scenes from a mauling

May 4, 2011 | Housing, Malls, Markets, Retail, Reuse, Shopping centers, Speculation, Urbanization, US News

By: David A. Smith 

 

America has more shopping centers and malls than it will ever need again in its history – and that massive devaluation of an asset class will remake our cities, our suburbs, and much of the transport infrastructure linking the two.

 

Probably hummed when Pac-Man was new

 

Before the FedEx truck, before the internet, stores were showrooms and warehouses wrapped into one.  In an internet world the physical store disappears, to be replaced by Google, a massive network server, a call center, a shipping agreement, and an enormous warehouse located convenient to transport nodes.

 

What then is a store? 

 

A dead mall: a retail space without people or goods

 

That question is implied but not asked by a Wall Street Journal article slow on the uptake.

 

A store’s essentials are selection (where I can find many choices for what I want), payment (I give the store money and they sell me an object), and delivery (I get the object from my store to where I want it). 

 

Once upon a time, stores had goods

 

Selection comes to me via Web – point and click.  So does payment.  And delivery arrives via the UPS or FedEx truck. 

 

Mall vacancies hit their highest level in at least 11 years in the first quarter, new figures from real-estate research company Reis Inc. showed.  In the top 80 U.S. markets, the average vacancy rate was 9.1%, up from 8.7%.

 

Portrait of a sector in permanent shrinkage

 

And you ain’t seen nothin’ yet, fellas.

 

The outlook is especially bad for strip malls and other neighborhood shopping centers. Their vacancy rate is expected to top 11.1% later this year, up from 10.9%, Reis predicts. That would be the highest level since 1990.

 

Always it will be the weakest sub-class that dies first – and that will be the strip malls, the 1940s-50s invention superseded by the malls and then by the mega-malls. 

 

Not all retail properties have suffered as much, especially on the high end. Large, publicly traded mall owners like Simon Property Group Inc. and Taubman Centers Inc., which tend to own top-tier properties, have trimmed their vacancy rates to 7% or lower and lifted their lease rates in the past year, buoying their stock.

 

Malls were so gnarly, dude 

 

The malls hit their apex in the early Eighties, when films such as Fast Times at Ridgemont High and Commando celebrated the malls’ world-within-a-world atmosphere.

 

Good place for a gun fight, eh Arnold?

 

Additionally, the recession appears to have speeded a shift in habits that has more Americans shopping online. Online retailing surged to 12% of the total during the holidays.

 

Recessions not only shake out businesses, they also shake up consumer patterns, and whole industries can wither or even disappear entirely.  By contrast, booms conceal a multitude of structural weaknesses, as any damn fool can make money in a boom. 

 

A broader glut has struck some of the exurbs that saw heavy housing development during the boom, where malls and strip centers built for growth that never came.

 

Much of this boom in retail was driven by cheap capital, starving for yield, that sought to finance anything that resembled a long-term income stream. 

 

More than one billion square feet of retail space was added in the 54 largest U.S. markets since the start of 2000, according to CoStar Group’s Property & Portfolio Research Inc. of Boston.

 

Converting that into measurements AHI readers will readily understand, that equates to roughly 1,000,000 new rental apartments’ worth of square footage – a staggering increase in supply of an asset class whose demand (unlike housing, which is an essential commodity) is subject to consumer whims.

 

In part, the decline reflects a continued drag on spending from the recession. But many retailers that had been stalwart mall- and strip-center tenants, like Borders Group Inc. and Blockbuster Inc., have floundered.

 

Not bad for consumers, but bad for malls

 

Even successful chains have closed and shrank hundreds of stores as they retrenched.

 

During this century’s first decade, mall occupancy was inflated by the expanding economy, which encouraged larger and more stores – and because internet shopping had yet to establish its grip on consumers.

 

“We will hit a tipping point soon, if we have not already,” said Leon Nicholas of retail consultancy Kantar Retail, “where online will become so mainstream that retailers will wonder what they need some of these big boxes for, when you have a retail presence in everyone’s pocket via your smart phone.”

 

Nicholas is leaning toward a tipping point

 

As an asset class, large mall-oriented retail is on the wane – a permanent wane, irreversible and scarcely to be resisted.

 

In some towns, city officials are looking for ways to revive, or even redeploy, mall space.

 

Forget reviving dead malls (for the morbidly curious, they have their own their own web site).  They must either be demolished as a public hazard, or redeployed.

 

Worth more demolished than standing

 

What to do with our now-irrelevant malls?  To answer that, we have to reverse the original question, What is a store?, and ask a complementary question, What is the best use of a huge enclosed divisible space surrounded by parking and roads?

 

What can we reuse this for?

 

In the Denver suburb of Westminster, Colo., city officials are negotiating to buy and raze the 34-year-old Westminster Mall and redevelop it into offices, homes and stores.

 

In reinventing the mall real estate, forget everything about its past, and just look at the real estate assets:

 

·         Great, high-traffic locations.

·         Terrific access, especially personal vehicles.

·         Parking.

 

Given these assets, and the mall’s essential value proposition – bringing many people together – the answer must be, Interpersonal contact among people.  If there is no human interaction within a mall, there will be no reason it to exist.  That leads to four possibilities:

 

1. Socialized public experiences.  Restaurants, coffee and snack shops, wine bars, sports arenas.

 

Some landlords have hedged against the impact of online shopping by adding more tenants like restaurants, entertainment venues, fashion stores and other wares not often bought online.

 

Good eats at the Zombie Mall!

 

2. Inescapably personal services.  Dentists, doctors, tailors, gyms and personal trainers.

 

Longtime strip center tenants like dentists and tax preparers are even more coveted now.

 

3. Socialized work experiences.  Offices and businesses that produce intangible products, or services.

 

Or fleeing from zombies: Dawn of the Dead

 

4. Housing.  The most logical and important of all.

 

The 1.2-million-square-foot mall, once home to a Macy’s, Trail Dust Steak House and Mervyn’s, has seen its sales-tax generation plummet in recent years, to $1.5 million last year from $8.5 million in 2000, city officials say.

 

Howdy, pardner – welcome to the mall!

 

Capital moves faster than real estate, which of course cannot move.  So when markets shift, real-estate-based revenues (property taxes and retail sales taxes) also plummet.

 

“What is regrettable from the city’s standpoint isn’t just the loss of sales tax revenue, but more importantly than that it is the loss of a significant activity center and gathering place for the city,” said Brent McFall, Westminster’s city manager. The mall went “from a place that was once vibrant to something that is now virtually vacant.”

 

Once a mall falls below a sustaining occupancy (say 60%), then it will spiral down, unable to pay its ongoing infrastructure costs and shedding customers (people are social creatures) until it is fully vacated.  Just like Detroit will be unless it takes bold steps.

 

Officials in North Plainfield, N.J., are trying to prop up a 219,000-square-foot strip mall whose Kmart closed on Sunday, boosting its vacancy rate above 50%.

 

Their effort is understandable and possibly even laudable … but overwhelmingly likely to fail.

 

In the 1960s, the Korvette shopping center in Paramus, N.J

 

That’s a threshold that puts many shopping centers into a death spiral. The center also has lost a Pathmark grocery store, Ruby Tuesday and J.P. Morgan Chase & Co. bank branch.

 

Grocery stores aren’t high profitability, but they’re high traffic, and that enhances the mall’s appeal for other smaller, more profitable stores.

 

Come for the Pathmark, stay for the Ruby Tuesday

 

But many small businesses typically housed in strip centers have been particularly hurt by the weak economy.

 

“The ongoing challenge is there is very little capital for those small businesses to expand and open new stores,” said Jim Sullivan, a retail-property analyst with Green Street Advisors. “Until that capital arrives in a meaningful way, strip-center vacancies are likely to remain stubbornly high.” 

 

Besides, grocery stores too are under pressure from internet shopping. 

 

Please don’t squeeze the merchandise

 

The Great Atlantic & Pacific Tea Co., the onetime retail goliath that had shrunk into a northeastern supermarket chain operating grocery stores such as A&P and Pathmark, sought bankruptcy protection in December and said last month it was closing 32 stores.

 

 Borough officials are looking into ways to ease building codes and may seek tax abatements to help the landlord, Vornado Realty Trust, attract a new tenant. “It’s a gateway to the town,” said Frank Stabile Jr. head of North Plainfield Economic Development Committee.

 

 North Plainfield must repurpose the mall, most likely into housing and offices, or even mixed use.

 

The American shopping mall: Born 1955.  Died 2005.

 

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Comments

Comment from Matthew D Healy
Date: May 4, 2011, 8:54 pm

From the NY Times just a few days ago: “Now, Gov. Chris Christie and the developers of the Mall of America have struck a deal to pour in $1 billion more in hopes of reviving the oft-ridiculed Xanadu Meadowlands complex, according to people involved in the talks.” Several billions have already been poured down this particular money sink.

This stillborn mega-mall is one of the ugliest things visible from the NJ Turnpike, a road from which many ugly things can be seen.

Comment from David A. Smith
Date: May 5, 2011, 12:21 pm

Great spot, thanks!

A link to the NYT April 29, 2011 story is here (http://www.nytimes.com/2011/04/29/nyregion/deal-reached-to-expand-xanadu-mall-project-in-nj.html?_r=1). Do note that New Jersey’s money, if invested, would be matched by a substantial outside infusion. “The [development] company would invest more than $1 billion, add a large indoor water park and a skating rink and keep the 600-foot indoor ski slope.” Further, the state’s money would be in a recoverable form (” the state agreeing to provide low-interest financing”) that presumably will be senior to the new owner’s equity investment.

I do find it amusing that this stalled monstrosity is named after Charles Foster Kane’s vast never-finished mansion.