The De-Malling of America

Ten years ago, before the Great Recession, I was a consultant to one of America’s largest retail shopping center owners. The stated goal was to see if we could redesign, repurpose, and reprogram the concept of their existing shopping centers to include housing. We focused on two malls, one in Southern California and another in the San Francisco Bay Area. The idea was to include during the remodel of the mall, a significant number of residential units into the property’s footprint. There was all this delicious asphalt ready for housing; all we had to do was set goals and then a direction.

The effort failed, mostly because of the collapse of the financial markets, housing, and the bankruptcy of the client. However, I still believe that these sites are gold mines for the current and on-going realignment of retail and commercial space for two good reasons.

• 1.     The sites usually have excellent access and are at important and critical transportation nexus points.
• 2.     In most instances the underlying dirt is either free (paid for out of the old center’s previous life) or at a substantial discount to the nearby costs of land.

Additional bonuses are that many have modern infrastructure (more or less) and willing politics. Nothing gets a city’s attention faster than a decline in sales tax revenues. It is projected that a quarter of all malls will close during the next five years.

In some instances these old malls can be rebuilt as town centers, dense residential neighborhoods, or a mix of commercial, retail (service and restaurant), housing (rental and for sale), and even transportation hubs. The old concept of single use zoning is rapidly fading and new concepts are immerging.

The greatest difficulty I found with many of these development companies is a lack of expertise and imagination. They know housing, they know retail, they know office, but they refuse to understand each other’s land uses. This has to change.

It will also require cities to change zoning and land use models. Many communities built into their General Plans a long term program that is now inflexible and counterproductive. No matter how important, it can take years to modify and codify them – this while everything around them collapses and disappears. The market place is not a kind and benevolent beast. As Ludwig von Mises said in his great book, Human Action, “The market is supreme!” Believe it!

We are discovering that now, it is often a hard slap to the face. Amazon buying Whole Foods is just one example; the real examples are the high-end retailers such as Nordstrom, fighting loosing battles to just stay alive over 6% reductions in year to year sales. Shoppers? If you want loyalty, get a puppy.

I worked for an architectural design studio back in the 1970s that focused on the newest thing in retail shopping, the “enclosed” mall. Our clients were the big boys of the day (they are still around, but certainly not the big boys they were). These new malls destroyed the old town centers and main streets of America, especially in the Midwest and the East. And now, the Internet is doing the same thing; it is a revolution that is both cultural and financial. Sure you can point a finger at Amazon, that’s easy. But in reality, it is every brick and mortar retailer who is offering their products online and with a broader selection and home delivery.

The models are changing, the way we shop is changing, what we buy is changing, and most especially why we buy is changing. Even the way we live is changing.

During the last fifty years nothing has occupied architects, urban planners, and city officials more than what will become of our cities. We have had anti-suburbanists, neo-traditionalists, urban revivalists, edge city believers, survivalists, futurists, and even blow-the-hole-thing-up-ists, telling us how cities MUST be redesigned. Most without a clue or real plan.

I remember a science fiction story from my youth where everyone lived in their own little cell, it was a nice cell, comfortable, with entertainment and all the necessities of life, and everything arrived at the door—all you had to do was ask for it. Paranoia raged, we were defensive and protective of our cell—all because we didn’t go out anymore.

Are we there yet?

Stay tuned . . . . .

200 Blog Posts and Still Writing

This week’s blog is the 200^th post I’ve cobbled together since starting this whole blogging thing on June 23, 2010. It is hard to believe that almost five years have elapsed. My father, a journalist in one of his many past lives, said (paraphrasing), “See, the work of a weekly columnist is hard—it’s almost impossible finding something pithy to say every week.” I can’t disagree, some weeks I get nothing. But, here we are another week and another post. A toast—to my post.

My little burg, Walnut Creek, California is exploding. On a per acre basis there is more development and construction happening in this town than most Bay Area communities can even dream of.

The "New" Broadway Plaza

Currently there are more than a 1000 apartments under construction within and around the city center. There are also numerous projects in the final stages of planning and approval within this same envelope. Soon a massive retail and housing complex at the regional BART transit station, after years of planning, “may” get underway. In the secondary ring, one to two miles out, even more is under construction – case in point a new Safeway retail complex. So much is under construction the city is considering taking a breath and slowing down the approval process.

One of the largest retail projects in the region is the rehabilitation and remodeling of the Macerich Broadway Plaza retail center. This is a $250 million dollar facelift with up to 300,000 square feet of new retail, restaurants, and commercial uses. This will also include new multi-level parking garages and more than 800 new parking stalls. When completed this overall retail mix will be one of the Bay Area’s finest (and toniest) retail destinations.

The city itself recently approved and funded almost a half million dollars worth of downtown improvements. These will include pedestrian upgrades, weekly food and social events, parklets (the new urban fad), and signage and supporting marketing banners.

Every city's, no matter how large or small, greatest concern should be its brand. We all know what happens when this is neglected and falls apart, look at the Detroit brand and the Oakland brand. In fact, look at the whole “rust belt.” It take years, if ever, to recover from a failed urban brand. It is critical that the politicals within a community support in every way they can the developers who are building the housing, the retail, and the commercial uses. Their job is to keep the public side looking good and provide a safe welcoming environment. It takes very few miscues in these days of instant communication to destroy years of hard work.

Here is to looking at 200 more blog posts. There is still much to write about considering the strange world of electric cars, the California train to nowhere, silly urban planning, and the always interesting housing market.

Stay Tuned . . . . . . . .

The Re-Malling of America

A couple of very interesting developments over the last few weeks may significantly shake up the retail mall industry in the United States. The first of these is the hostile bid by Simons Property Group of Indianapolis, Indiana to take over The Macerich Company of Santa Monica, California. Between them they own and operate over 425 malls and retail centers in the United States and foreign countries. (Macerich – 95 properties and Simons – 325+ properties, source Wikipedia). I would venture to guess that 90% of Americans are less than one hour away from one of their respective centers. The second and even more fascinating is that the Edmonton, Alberta based Triple Five Group that owns the Edmonton Mall and the Mall of America is proposing a 4 billion dollar super, humongous, enormous, colossal entertainment and retail “mall” near Miami.

I have been directly involved in one form or another in the mall design business since the days of Alfred Taubman in the 1970s. Then some of the most exciting changes to the retail industry were underway. And many of these changes wrought terrible things on towns, peripheral suburban communities, and even downtown traditional retail centers. This is not the place to get into the history of malls in America (and elsewhere), but it is the place to look at how the forces of the marketplace consumer seem to be one step ahead of the retailers and mall owners. We went from small town America, to mid-sized suburban shopping centers, to enclosed weatherproof malls and super-malls, to massive retail centers with a mix of enclosed and open pedestrian areas, to remodeling the traditional downtown, to massive failures due to high debt by some of the largest mall owners (example: General Growth Properties), and now to the restructuring of both the mall concept itself and the companies themselves.

The biggest change seems to be in the venues themselves. Most enclosed malls were isolated at their start, primarily due to location (freeways) and cheap land costs. These were the 70s and 80s, now these malls are surrounded by residential development as well as ancillary retail and office complexes. Some have even sparked “new towns” around them. These malls are redeveloping to now include housing and office uses.

Some are beginning to emulate the entertainment aspects of some of the larger malls. While questionable, if there are enough customers many things are possible.

Why would Simons want Macerich, I have my own ideas? Simons has been very aggressive in trying to increase its square footage. Five years ago during General Growth’s serious financial problems, Simons tried unsuccessfully to take over the company, eventually they walked away. Simon has properties in Europe and Canada and have aggressively expanded into the premium outlet market. Macerich, while having some outstanding properties (Santa Monica and Walnut Creek, California), is also a developer/owner of mid-sized sub-regional centers across the United States. These properties would complement Simon’s collection. Whether Macerich can fight off Simon as well as General Growth did remains to be seen. The concern is that the customer will suffer if these acquisitions go forward is of little concern. The customer is, and has, shown itself to be fickle and will go where there is the best value, venue, and variety to shop. Failure to provide this is not an option. My guess, it is the long-term leases of many of the high-end retailers located within the Macerich centers (Nordstrom, Niemen Marcus, etc.). GO HERE  

But, Triple Five’s direction is totally different. GO HERE  To used an over-worn phrase, the are trying to Disneyfy the retail experience. Their new Miami complex will include a ski slope, a water park, a sea-lion show (not in favor of these myself), miniature golf, bowling, as well as everything from the usual restaurants, hotels, and condominiums. There is even a rumor there will be retail stores and shops. Wow and double wow, the fun and games of the retail giants of Minnesota and Edmonton Central Plains of North America are coming to South Beach. Many of these enticements have been tried before, especially during the late seventies with circus type retail malls and themed venues (skating, park-like spaces, and roller coasters). Most failed or were junked.

I have also found that these centers can never create a new market. They can only steal customers from other markets; this is what caused many of the suburban problems in the 1980s when the enclosed mall did so much damage to the traditional downtowns of smaller communities. These things are very expensive, I will wait to see if they can find the funding.

And lastly the big can get bigger. It was announced that the “new” General Growth (after its literal resurrection for the dead three years ago), is expanding its flagship mall in Honolulu.  GO HERE  Its Ala Moana Center (the world’s largest open-air mall) is expanding by another 660,000 square feet. They also sold a significant interest in the mall to an Australian retirement fund, AustralianSuper. While Ala Moana is not performing to industry standards, GGP is obviously seeing a different future than what many analysts’ see. The world is flooded with money at the moment trying to find a home; many are betting that the American REIT industry is one of the best places to be. I wish them luck.

Stay Tuned . . . . . . . .

Oversupply – Everywhere

“Buy land, they ain’t making any more of the stuff.”

Will Rogers

Even with the inevitable and growing dearth of housing, one commodity is still in great supply around most cities, land. During the past twenty years every city that could expanded their supply of job-producing lands for everything from retail and commercial acreage to industrial, warehousing and office. Now there is zoned land everywhere for non-residential use and it’s forcing down land prices, all to their own competitive disadvantage. And sadly the jobs aren’t coming either.

Restrictions on housing development, especially in most areas of California’s 50 mile coastal strip, and the foreclosure crisis have pushed prices up and up. Foreclosures have led to higher prices simply because these units have been pulled out of the retail market and are now being rented. As with all things this is temporary but the result is a severe lack of housing and increasing prices. You mess with the demand-supply balance and that’s what you always get. Some builders I know in the Central Valley of California have not built one house in five years.

And that’s what’s happened to commercial real estate in all its various forms, oversupply. Commercial lands in foreclosure are being quietly peddled in bankruptcies at fifty cents on the dollar or even less. Along the freeways there are miles of land zoned as commercial/business/professional and they can’t give the land away at any price. Cities are left scratching their collective heads. There are bright spots such as San Francisco and some areas of the Silicon Valley – but other areas are begging for users and jobs.

Housing always leads, or it used to. More homes means more people resulting in more demand for commercial uses; that was the usual mantra. Now, not so much. Areas immediately to the east of the San Francisco Bay area are now, once again, beginning to supply low-cost housing to the job centers in the East Bay and Silicon Valley. Buy a nice house at a great price and receive, at no extra cost, a daily five hour commute regime. But you’re fortunate. A similar home in the San Jose are will cost you three or four times the price, and to be honest the internal commutes within Silicon Valley are almost just as bad.

We have overbuilt retail, we still have empty office buildings, and signs saying “Available” hang on empty warehouse buildings. Anyone want a million square foot warehouse? No, how about an enclosed shopping mall? Amazon is flying into the logistic centers that surround our major cities, demand secrecy, and then provide jobs at about 1 per 1000 square feet. Cities need four and five per 1000 to even come close to justifying the infrastructure costs. That rebalance won’t happen for a long time.

I see a lot of rezoning of commercial lands to residential in the future. One way or another, the costs of the infrastructure already in the ground will force cities to make these changes – someone has to pay for the bonds.

But the bright side is that these lands are a bank account that can be drawn on when the time is right. During the fifties and sixties a lot of development came from outliers who, like the sod-busters of the late nineteenth century, opened the way for the massive suburban growth and the spectacular rise of the American economy.

And I can see this again in America’s future – I’m hardly a Pollyanna, but when the time is right there will again be another dramatic shift to the suburbs.

Stay Tuned . . . . . .