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BY THE TIME PRICEWATERHOUSECOOPERS RELEASED a report in early 2001 declaring that nearly 20% of America's regional malls were on the endangered list, mall owners and investors were already painfully familiar with the problem. The projects of the 1970s and 1980s — massive, enclosed shopping centers set down in a sea of asphalt and anchored by department stores — were hopelessly dated and out of step. The buying public had voted with its feet — or tires — and opted for the big-box discounters and specialty retailers. Some of them were even heading to the trendy stores and cafes of newly spruced up downtowns that had been the victims of the malling of America.

The report was shocking: Among regional centers with more than 350,000 sq. ft. of gross leasable area (GLA), 140 were classified as “greyfields” — properties that would require significant public- and private-sector intervention to stem decline. The study, commissioned by the Congress for the New Urbanism and titled “Greyfields into Goldfields: from failing shopping centers to great neighborhoods,” conservatively estimated that an additional 200 to 250 such malls were approaching greyfield status.

The term “greyfields” refers to malls where sales have dropped to the point that a thorough redevelopment. In many cases that will mean converting the properties to mixed-use formats — introducing office buildings and/or residential development as well as public amenities. And, in some cases, redevelopment may mean wholesale conversion from retail to other uses.

“There are a lot of obsolete sites that need a change of use,” says Michael Beyard, a senior resident fellow and retail expert with the Urban Land Institute (ULI) based in Washington, D.C. “Just because something was retail doesn't mean it should always be exclusively retail.”


Beyard describes many shopping centers built in the boom years of the 1970s and 1980s — the golden age of mall building — as “monocultures” because of their singular use. “They have all the risks associated with monocultures in biology — one activity, one organism,” he says. “It's like if you plant one crop over and over, you deplete the soil. If you have 10 crops, you constantly replenish the soil.” And what's true for biology is also true in the dismal science of economics: The lack of diversity makes retail-only properties more vulnerable to boom and bust shopping cycles.

Grasping what's at stake, regional mall owners, such as General Growth Properties and Westfield Corp., are plowing millions of dollars into redevelopment, renovation and expansion projects.

These mall overhauls provide some of the best risk-adjusted returns in the commercial real estate business, says Matthew Ostrower, a retail REIT analyst for Morgan Stanley Dean Witter in New York. “I'm not just talking malls, but every asset type,” says Ostrower. “I generally view it as a lower risk than new development, and redevelopment provides higher returns.”

If it's executed properly, a redevelopment project can produce returns ranging from 12% to 15%, Ostrower says.

The industry gets it, according to “Dollars & Cents of Shopping Centers: 2002,” a study by ULI. Twenty percent of 138 respondents said they had renovated their regional centers in the past five years, 22% said they had expanded and 11% said they had done both.


The endangered malls are a victim not only of changing demographics — in many cases the profile of the trading area has deteriorated — but also of their own success: They attracted competitors and, in recent years, 1 million sq. ft. behemoths. The result is a glut of retail space and, in particular, space in the wrong kind of places — those 400,000 sq. ft. to 800,000 sq. ft. centers from the 1970s and 1980s that are looking tired and uncompetitive.

Statistics compiled by the International Council of Shopping Centers (ICSC) show that between 1976 and 1992, the number of such centers nearly doubled, from 643 to 1,170. By 2000, there were 1,424 centers in that size range. Add in the power centers and other recent developments and you see a picture of dangerous excess. According to the National Research Bureau, in 1986 there was 14.7 sq. ft. of retail per capita in the U.S. That number has risen to 20 sq. ft. per capita.

“Are people buying 50% more goods than they were?” asks Beyard. “That high rate is masking a lot of dysfunctional space, which is just limping along and not selling enough per square foot to justify its existence any longer.”


Everyone understands the greyfields problem intuitively, says Will Fleissig, principal at Continuum Partners, a Denver-based commercial real estate developer. “Just go drive somewhere and you will see these boarded-up centers,” he says. “You know as soon as one of these 1 million sq. ft. or 2 million sq. ft. malls gets built, the smaller guys will wither and die and start to lose some of their anchor tenants.”

Continuum is in the early stages of one of the most ambitious greyfield rehab projects in the nation in the Denver suburb of Lakewood, Colo. On a 100-plus acre site, the former Villa Italia mall will be transformed into a new mixed-use project known as Belmar. The $560 million, 10-year redevelopment project is a public-private partnership between the city and Continuum. The infrastructure costs alone for the project are estimated at more than $165 million. Demolition of the Villa Italia began a few months ago.

Developed by Gerri Von Frellick and opened in 1966, Villa Italia held the distinction of being the largest indoor shopping mall between Chicago and the West Coast with 1.4 million sq. ft. of GLA. The mall was located in the heart of downtown Lakewood, population 150,000.

The original anchors were Montgomery Ward and Joslins. The mall was updated in the late 1980s, but intense competition from surrounding malls, declining sales and high vacancies ultimately killed the 35-year old center, which closed on July 15, 2001. Continuum bought the ground lease and the improvements on the site from The Equitable Co. in the spring of 2001.

The first part of the project, scheduled to be completed in 2004, features 634,000 sq. ft. of retail space, including a 16-screen movie theater, 153,000 sq. ft. of office space, 105 housing units and an 800,000 sq. ft. parking garage. Ultimately, the project will encompass 19 city blocks.

“The key is that the city wants a downtown,” says Fleissig. “It's not just an entertainment/lifestyle center. This is a very interesting proposition to design a new downtown that has the character and the kinds of mixed uses of downtown.”

Continuum Partners seeks a minimum return of 12% on projects such as Belmar. “It's our experience that projects and properties that are located inside mixed-use and pedestrian-scaled neighborhoods definitely hold value much better over the long term than properties that are more single-purpose,” says Mark Falcone, managing partner of Continuum Partners. “We believe that's because the mix of uses helps the properties weather various cycles.”

Fleissig, who is a licensed architect and holds degrees in urban design and public finance and administration, says he's convinced that the greatest payoff for investors and developers will be found in building and refurbishing existing retail properties.

“It's not in the greenfields,” he says. “We don't want to be building out there because we don't want to fight the market-share battle later on.”

Louis Taylor, senior real estate analyst with Deutsche Bank Securities in New York, agrees there has been a shift. “More and more now, the idea that we can expand into the prairies of America is being challenged,” says Taylor, referring to urban sprawl. “Development that occurs in far-flung, greenfield sites takes people away from the office and job centers.”

Not that greenfield development will end. But, “these sites will be denser and have more of a mixed-use element,” says Beyard of ULI. “They may have a town center designed from scratch rather than a regional mall in a parking lot.”

Grasping the concept and turning it into reality are two different things, however. Experts say that mixed-used projects on the scale of Belmar require “patient” capital because they take years to complete. They also require operating skills that not all developers have — including managing long-term partnerships with the local authorities, which is essential for such projects.

And some analysts question the promised payoff. In March, Rockville, Md.-based Federal Realty Investment Trust, which had made a huge strategic commitment to the “new urbanism” concept, abruptly shifted gears. The company announced plans to replace its CEO next year and a plan to generate more immediate returns by backing away from mixed-use projects. Instead, the company will put its money into acquiring and developing neighborhood shopping centers.

The move was applauded by analysts, who had been critical of the huge investments and slow payback of mixed-use projects. The company says it will complete Santana Row in San Jose, Calif., its most ambitious project, which at $475 million represents more than a quarter of its $1.8 billion asset base. But that will be the last such project, the company says. After the March announcement, Federal's shares rose to a 52-week high of $28.50 in mid-April.


There is little question about the success of one high-profile greyfield project: Mizner Park in Boca Raton, Fla. The 30-acre, mixed-use development is named after famed architect Addison Mizner, who created what is now the Boca Raton Resort and Club and whose style influenced design throughout the region.

Mizner Park occupies the site of the former Boca Mall, a 430,000 sq. ft. regional shopping center developed by Smathers, Plagginger and Aronovitz that opened in 1974.

The original anchors at the enclosed shopping mall located in the middle of town and surrounded by a wide asphalt parking lot included department stores Britt's and Jefferson's.

A decade later, the mall was plagued by two trends: population growth was occurring west of the city, and competing malls such as the 1.3 million sq. ft. Town Center at Boca Raton were winning the market-share battle. The original anchors had departed and many of the in-line stores had gone out of business.

“By the mid-1980s, the mall was on its way out,” says Jo Ann Root, marketing director for Mizner Park. “You would walk into the Boca Mall and it would smell musty. There would be a lot of vacancy. There was no longer any reason for people to be shopping at the Boca Mall.”

In 1980, the city government created the Boca Raton Community Redevelopment Agency, a group of civic and business leaders and private citizens. The downtown area eventually was designated a blighted area and a $50 million program was launched to improve the downtown infrastructure.

Crocker & Co., a local real estate company respected for its work in the community, led the redevelopment efforts of the public-private partnership along with its partner, New York-based TIAA-CREF, a giant financial services company. In 1989, Crocker began demolishing the entire Boca Mall and erected the first phase, a $60 million mix of residential units, retail and office space.

Today, an additional 104,000 sq. ft. of commercial office space is located above the ground-floor retail on one side of the street, and more residential units are located above the retail space on the opposite side. In all, 272 apartments and townhouses are on the site. The project was capped off in 1998 with the construction of the 7-story Mizner Park Office Tower at a cost of $25 million. The Class-A building includes 165,000 sq. ft. of office space.

Has Mizner Park paid off? Today, the project features 156,000 sq. ft. of retail, in addition to an 80,000 sq. ft. Jacobson's department store. In 2001, retail sales at stores that had been in the center for all 12 months averaged $556 per sq. ft., according to Root, more than twice the national average. The office tower is currently 81% occupied, and Root says that negotiations are under way with a prospective tenant that would bring the building to full occupancy.

Root believes Mizner Park stands out even among mixed-use projects because two-thirds of the site is devoted to public areas. The land is all owned by the city of Boca Raton.

“When you are here it doesn't feel like a lot of other mixed-use sites,” says Root. “We have a lot of park land. We've become a gathering space for the people of Boca Raton. We have an amphitheater on the north end that's being redeveloped now that draws anywhere from 3,000 to 5,000 people for events. The people feel part of a community when they come to Mizner Park.”

Upon completion of the project, Crocker & Co. sold its interests in Mizner Park to TIAA-CREF.


Clearly, not every dying mall can be turned into a new downtown commercial/recreation district like Mizner or the planned Belmar. But, analysts warn, developers who are sitting on aging regional malls need to think big or make plans to repurpose their properties. “Too many owners believe that a lick of paint and a new floor tile are the answers to a failing mall,” says David Doll, senior executive vice president of development for Los Angeles-based Westfield Corp. The firm manages the Westfield America portfolio of 39 U.S. centers. “Often, owners haven't understood the dynamics of why a particular center is trending downward. Or when they have a strong center, they haven't understood how to build on those strengths.”

Westfield did not make that mistake in St. Louis, where it has taken major steps to redevelop the former West County Shopping Center. In July 2000, Westfield began work on a $232 million redevelopment of the suburban St. Louis site. Developed in 1968 on 51 acres, the one-level, 583,000 sq. ft. center closed in January 2001. Westfield, which acquired the property when it purchased the CenterMark Properties portfolio in 1994, scrapped nearly the entire site. Only the JCPenney was left standing and will remain closed during the remodeling.

In addition to JCPenney, Famous-Barr was the other original anchor. By the 1990s, it was apparent that the center needed four anchors to remain competitive with surrounding malls, says Doll. Because not enough land was available to accommodate a horizontal expansion — the center was surrounded by freeways on one side and a cemetery on another side — the solution was to grow vertically.

When the new, 1.2 million sq. ft., 3-story center opens on Sept. 20, it will include a renovated JCPenney, the only Nordstrom in the state of Missouri, Famous-Barr and Lord& Taylor. An 85,000 sq. ft. Galyan's, the first outlet for the outdoor sports store in the state of Missouri, will occupy the third floor. The center also will include 175 specialty shops.

A redevelopment of this magnitude doesn't happen overnight. Plans for the overhaul of West County Shopping Center began in the 1990s and went through several stages. “We finally came up with a plan that met the needs of the anchor tenants, the needs of the city and the needs of the trade area,” says Doll.

Westfield Shoppingtown West County, as the new mall is called, is one of six current or recently completed redevelopment projects undertaken by Westfield.

One advantage of redevelopment projects in established areas is that the demographics are known, explains Doll. “We can determine why an existing project's market penetration within its trade area isn't higher, or determine if it has the capacity to be higher, and then begin a development program that addresses those issues.”


The plight of many of these older malls creates opportunities for REITs such as Chicago-based General Growth, says CEO John Bucksbaum. General Growth, which owns or manages 142 regional shopping malls in 39 states, has 12 redevelopment and renovation projects under way.

“Never in the history of our company have we been as active with redevelopment and/or expansion of our existing properties as we have during the past three years,” says Bucksbaum. He added that the company expects a return of 12% or higher on its redevelopment and expansion projects.

One of General Growth's showpiece renovations is the 1974 Park Place mall in downtown Tucson. The company purchased the mall in 1996, and has pumped nearly $100 million into upgrading the property since then. “It's kind of a big number, one of the largest,” Bucksbaum says.

In the course of the project, Park Place has grown from 850,000 sq. ft to 1.1 million sq. ft. and has morphed into a shopping, dining and entertainment complex. Among the improvements: renovation of the interior common areas and food court; the construction of a new 200,000 sq. ft. Dillard's department store; the addition of an exterior street scene featuring Borders Books, Old Navy, Z Gallerie, Abercrombie & Fitch, Talbots/Talbots Petites, Starbucks and Sharper Image; the construction of a 20-screen Century Theater complex; and the addition of a children's play area.

Once considered a marginal performer in its market, Park Place is exceeding General Growth's expectations. “We could not be more pleased with Park Place,” says the CEO, who adds that the project is yielding a return in excess of 13%.

Eden Prairie Center is another General Growth property that has undergone a major redevelopment. Opened in 1976 in Eden Prairie, Minn., the two-level, 870,000 sq. ft. mall was acquired by General Growth in the mid-1990s. During a renovation that began in June 1999 and ended in October 2001, every portion of the mall was renovated or remodeled. Construction included the addition of a Von Maur department store. A new 140,000 sq. ft. entertainment wing features an 18-screen AMC movie theater with stadium seating, multiple sit-down restaurants and a new food court.

General Growth re-merchandised the center by attracting national and regional retailers such as Ann Taylor, Talbots, Hot Topic, Charlotte Russe and Old Navy. Eden Prairie Center averaged sales of $213 per sq. ft. among non-anchor tenants as of March 2001, according to the Directory of Major Malls.

Bucksbaum says the limited amount of new development that's occurring industry-wide has provided opportunities to re-merchandise existing malls such as Eden Prairie Center. General Growth and other REITs largely lead the way on the mall redevelopment front, Beyard says, because they are determined to maintain the investment value of their portfolios.

Beyard, who has written several books on the shopping center industry, says his dream is that all malls will one day reconnect with their communities. “I'd like for them to cease being stand-alone, artificial environments separated from their communities. We're seeing that already starting to happen, and that will begin to accelerate.”


Here's a picture no owner wants to see: A neighborhood shopping center with a vacancy rate in excess of 50%. That, however, is the situation Donahue Schriber, a private REIT, faced in 1999 only six months after its purchase of Paradise Square, a 104,000 sq. ft. center in Phoenix.

From the start, management recognized the potential to improve financial returns at Paradise Square, which was built in 1987. By 1999, the center was looking dowdy and rents were significantly lower than the surrounding market. The prescribed cure was to begin a $2.2 million renovation and attract new tenants as the leases of existing tenants expired.

But what management didn't foresee was the 55,000 sq. ft. Fry's supermarket — the centerpiece of the neighborhood center — closing its doors in September 1999. Kroger had purchased the Fry's chain and shuttered overlapping stores. Over the next 12 months, other tenants vacated an additional 24,000 sq. ft. of shop space.

The solution was to lease the space occupied by Fry's to a local, family-owned grocery chain, Bashas' Supermarkets, which opened at Paradise Square in December 2000. “We always knew that the center had upside potential, and the favorable terms of the new lease with Bashas' contributed substantially to the increase in returns,” says Mark Whitfield, executive vice president of development for Costa, Mesa, Calif.-based Donahue Schriber.

Leases also were signed with Rubio's Baja Grill and Panda Express, both of which opened in fourth-quarter 2000.

The renovation included improved signage, a new roof and exterior landscaping. As a result of the new tenants and the facelift, the center is yielding returns of 12%, says Whitfield.

Over the past three years, average rents per square foot at Paradise Square have increased about 29%. Today the center is 96% occupied.
Matt Valley

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