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Developers Rethink the Mall for the 21st Century

Developers Rethink the Mall for the 21st Century

Prior to the downturn the consensus in the real estate industry was that the days of the traditional regional mall were over. But a funny thing has happened: The recession has thrown a wrench into that theory.

Many of the concepts that were supposed to replace the regional mall, such as lifestyle centers and vertical mixed-use centers, suffered because of their reliance on discretionary tenants and limited trade area pulls, industry insiders say. Meanwhile, regional malls emerged from the downturn in relatively good shape.

In the first quarter of 2010, regional malls posted an average vacancy rate of 6.0 percent, a 130 basis points below the vacancy rate for specialty centers and 170 basis points below the vacancy rate for U.S. retail space overall, according to a report from the CoStar Group, a Bethesda, Md.–based research firm. The quoted rental rate for malls is at $21.25 per square foot, above the quoted rate of $16.27 per square foot for all retail properties.

That’s led the industry to look at regional malls with renewed respect, says Darrell Pattison, director of design with ka architecture, a Cleveland–based firm. “We are seeing a greater emphasis on enclosed environment, air-conditioned spaces,” he notes. “The enclosed mall properties are the ones that seem to be making the resurgence first.”

In the early and mid-2000s, one of the most common mall redevelopment techniques involved turning a portion of a traditional enclosed center into a mini open-air lifestyle center. By contrast, one of the projects profiled on the following pages, Baldwin Hills Crenshaw Plaza in Los Angeles, will retain its original enclosed structure. Another, City Creek Center in Salt Lake City, will merge two former enclosed malls into a modernized open-air mall that will feature a retractable roof that can be closed during inclement weather. Architects think this might be a groundbreaking technique that solves the dilemma of building open-air centers in climates with four distinct seasons.

At the same time, it’s not really the physical aspects of a regional mall that make it so enduring, Pattison points out. The truth is that many of the regional malls that were built 20, 30, 40 years ago were built in markets with the right demographics and still pull in a steady stream of traffic. Developers are getting savvier about repositioning these sites rather than building new ones.

“One thing that I’ve seen in most of the redevelopment projects that are going on today, we are seeing a real push toward New Urbanism, the mix of retail/residential and office,” says David H. Bader, director of landscape architecture and executive vice president with ka. “We are seeing those types of projects occurring pretty much all over the place.”

For example, Lane4Property Group, a Kansas City, Mo.–based firm that is redeveloping the Bannister Mall, has faced the same challenges during the recession as everyone else: low demand for new retail space, a defunct financing market and an anchor tenant that pulled out of the project at the last moment. But because the firm knew it had the right site it stuck out the tough years and now hopes to start construction in the next 24 months.

Moreover, developers learned that by employing a few modernizing techniques—the addition of offices and apartments; the incorporation of public spaces—it’s possible to bring regional malls into the 21st century.

“A regional mall, if it has the right tenant mix and offers value to the consumer, will be successful,” says Greg Lyon, design principal with Nadel Inc., a Los Angeles–based architecture firm. Plus, developers today better understand where and how to add residential, office and hotel components to bring maximum traffic into the center.

“They are more cognizant when it comes to recognizing what’s right for the site, as opposed to ‘Let’s roll it out anywhere,” Lyon says.

Click on the links below to read four profiles of innovative redevelopment projects currently in process.

The Trails

When Lane4 Property Group Inc., a Kansas City, Mo.–based commercial developer, bought the closed Bannister Mall at the intersection of I-435 and Hillcrest Road from a private investor in 2007, the outlook for mixed-use projects was brighter than ever.

So Lane4, which at the time was serving as a real estate consultant for the Kansas City Wizards Major League Soccer team, decided to turn the mall and the surrounding area into a mixed-use development incorporating a professional soccer stadium, approximately 2.4 million square feet of retail and 1.5 million square feet of offices on a 467-acre site. The vision was that revenue from the retail component, in combination with tax increment financing (TIF) from the city and state, would support the creation of a multi-use sports venue.

By December of 2007, Lane had secured a $230 million TIF from the city and another $20 million from the state for the new project, called The Trails. But the recession threw a wrench into the plan, which was further complicated by the shutdown of the CMBS market, where Lane had hoped to secure additional funding. Moreover, interest from retailers waned as sales faltered, meaning the plan to subsidize the stadium with income from the retail complex no longer made sense.

Lane had to wait to move forward. Unfortunately, the Wizards didn’t have that luxury. “Each year they didn’t have a stadium hurt their profits and hurt what they were trying to do, which was build up soccer [awareness] in America,” says Owen Buckley, president of Lane4 Property Group.

The Wizards ultimately accepted a stadium offer in Kansas City, Kan. That left Lane4 without a key component even as it was demolishing the remnants of Bannister Mall.

In spite of the setbacks, the firm believed in the area’s demographics. The site is on the confluence of three major roads on which 300,000 cars pass daily. In addition, more than 223,000 people live within 10 minutes of the site.

So Lane4 went back to the drawing board. It hired a nationally renowned land planner to help redesign the site. It scaled back the retail portion to 1 million square feet and opted to substitute the would-be stadium with entertainment/residential uses that are yet to be announced.

Industry insiders offer differing opinions on whether the loss of the soccer stadium should be viewed as a challenge or a blessing in disguise for the development firm. For instance, Dustin Watson, partner with Development Design Group, a Baltimore, Md.–based architecture firm, says it’s unfortunate because sports venues tend to bring in large crowds.

In any case, there seem to be plenty of unconventional uses such as a wave pool, an upscale bowling alley or a car dealership with a test-drive track attached that could take the stadium’s place, says Watson.

For his part, Buckley adds that Lane4 is determined to create something enduring. “We remain committed to building something that’s going to last 20 or 30 years,” he says.

City Creek Center

Who said the regional mall is dead? The concept is very much alive and cooler than ever, to judge by the City Creek Center in Salt Lake City, Utah. All it needed was a few modern twists.

To start with, the 700,000-square-foot City Creek Center boasts an unorthodox co-developer—the Church of Jesus Christ of Latter-Day Saints, which conceived the mall as part of its redevelopment of Salt Lake City’s downtown. The Church has its headquarters there and undertook the project to keep the properties surrounding its offices economically viable.

When the project got underway, in the early 2000s, the Church already owned the ZCMI mall on South State Street. The Church then purchased the Crossroads Plaza Mall across the street, with plans to combine the struggling centers into a unified retail emporium. When completed, the new retail center will be part of a 20-acre complex which will also include 1.6 million square feet of office space, 700 residential units and 500 hotel rooms.

The Church, which is handling the office and residential portions, brought in Bloomfield Hill, Mich.–based Taubman Centers Inc., to build its new mall. “They are a sophisticated real estate entity,” says Bruce Heckman, vice president of development with Taubman. “We looked at the opportunity and the caliber of the organization and we are very pleased to be partners.”

Taubman, which entered the project in early 2003, envisioned the new center as a traditional regional mall, but set in a walkable, largely open-air environment. The redeveloped mall will incorporate two main structures connected by a pedestrian sky-bridge. A 124,000-square-foot Nordstrom, formerly a tenant at Crossroads Plaza, will anchor the portion of the mall located on West Temple Street, while a 150,000-square-foot Macy’s store will anchor the one located on Main Street. A 1,200-foot waterway path will run through the mall’s walkways and plazas, mimicking the City Creek that once ran through that portion of town. Taubman also plans to install fountains and ponds in the mall’s public spaces.

In addition, the mall will incorporate a fully retractable roof, the first of its kind for a retail property in the U.S., according to Heckman.

The roof will be able to solve the problem of keeping the center active all year round, notes Greg Lyon design principal with Nadel Inc., a Los Angeles-based architecture firm. It will be made of transparent glass held up by curved columns, so it will serve as a skylight when the mall will be covered and will kneel down, disappearing from view, when recessed.

Baldwin Hills Crenshaw Plaza

When Capri Capital Partners bought the 1.2-million-square-foot Baldwin Hills Crenshaw Plaza in south Los Angeles for $136 million in 2006, the mall did not suffer from any serious issues with tenants. In fact, occupancy at the center has always been high, says Ken Lombard, a Capri partner in charge of redeveloping the mall. But the 30-year-old property felt outdated and bland. He graded its physical condition a “C-minus.”

What the mall had going for it were the demographics. There are more than a million people living within a three-mile radius of the property. The per capita income in the area is the highest of any diverse minority community in the country, Lombard says.

“This is a fantastic site,” says Jeff Green, president of Jeff Green Partners, a Mill Valley, Calif.-based retail real estate consulting firm. “It’s a very captive market; you’ve got to travel some distance to get to [another] regional retail center. What’s been the problem with the mall previously was just that it was old and not kept up. So if they make those physical changes, I think it will be a very good project.”

So Capri Capital Partners embarked on a multi-year project to bring the mall into the modern era. To begin with, the firm plans to upgrade the physical condition of the existing structure with new flooring and lighting fixtures, new entrances, a paint job and a new food court that is expected to house some of today’s more popular restaurant concepts.

Capri is also bringing in a new movie theater, a state-of-the-art multiplex with stadium seating and 3D screens.

This phase of the redevelopment is scheduled to start in the winter of 2011. In the meanwhile, the firm has been trying to pin down exactly what it wants to do with the rest of the 43-acre site.

On a larger scale, Capri would like to add offices and a hotel to the property, even maybe some residential units.

At the moment, the firm is awaiting approvals from the local government. When completed, the expanded, 2.2-million-square-foot development should serve as a stop on the Los Angeles light rail transit route.

The alterations will help give the shopping center a fresh feel and transform it into a destination retail center from a run-of-the-mill 1980s throwback.

“This mall is in just a fabulous location, surrounded by rooftops with great density and exceptional spending power,” Lombard says. “Obviously we are planning to make a very significant investment in it right now.”

Peninsula Town Center

When the once successful Coliseum Mall began to fall apart in the early 2000s, the local city council was concerned about more than just losing a retail destination. For many years, the 1-million-square-foot mall served as the single largest source of tax revenue for the City of Hampton, generating $3 million a year.

Both the city and the mall’s owner, New York–based Mall Properties Inc., knew something had to be done. They didn’t realize, however, how drastic the changes would need to be.

In 2005, Mall Properties hoped it could fix the mall with a $40 million renovation. But when it called in Columbus, Ohio–based Steiner + Associates Inc., the mall redevelopment specialist found the property had passed the point of no return, according to Yaromir Steiner, the firm’s founder and CEO.

The vacancy rate at the property hovered around 30 percent, even in a robust leasing market. Traffic had been declining for years. Entire product categories were missing. Retailers with expiring leases were not interested in renewing, nor were tenants remodeling stores.

Steiner opted to demolish most of the existing structures and create a new layout. The only building left is a Macy’s, which was remodeled. From 2007 to 2010, the remainder of the site was transformed into a vertical mixed-use complex featuring retail on the ground level with offices and apartments on the upper floors.

While such projects can be hard to pull off in suburban areas because the locals might resist the idea of living above retail, in cities where people are used to that kind of arrangement they can succeed, says Greg Lyon design principal with Nadel Inc., a Los Angeles-based architecture firm. “Vertical mixed-use creates vibrant, active, safe neighborhoods,” he notes. “Conceptually, it’s always a good idea, as long as it makes sense economically.”

The project was not without challenges. Most of the financing for the center was in place by 2007, when the recession took hold. The city provided roughly $93 million in tax increment bonds, but both Mall Properties and Steiner + Associates had to shell out more equity than they anticipated, for a total project cost of approximately $300 million.

It seems to have been worth it. While the new Peninsula Town Center has been open only a few months, retail occupancy is now above 90 percent and tenants are experiencing much better sales volumes than they did at the Coliseum Mall, notes Steiner. Hampton city officials hope the center will remain as their largest source of tax revenue, bringing in $6 million in taxes annually.

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