What is the most common reason to get in the car and start driving on any given day of the week? Depending on where you’re from, the obvious answer might be commuting to work. Surprisingly, though, this is not the case. According to the Department of Transportation as of 2017, 41 percent of daily trips are for shopping and errands, 27 percent are for social or recreational travel, and fifteen percent are for commuting. Retail is not only the biggest category of trips by volume, but it also represents a hugely oversupplied property use in the U.S. according to data from the International Council of Shopping Centers and Cushman & Wakefield: 23.5 square feet per person, as opposed to the next highest, Canada, with 16.8 square feet per person. After Australia, at 11.2 square feet, no other surveyed country exceeded 4.6 square feet per person.

In our newest research report, we explore the logic and risks beyond repurposing properties whose uses have become obsolete. But an interesting scenario appears when the property in question is not totally obsolete. Are there opportunities to eat up some of that excess retail space by combining multiple property uses within the shells of existing, somewhat but not totally obsolete properties? Consider a shopping mall facing growing vacancies. Around two hundred and fifty J.C. Penney stores may be closing, along with other familiar mall anchor and non-anchor tenants like Neiman Marcus and Victoria’s Secret. Instead of trying to re-tenant these spaces with other retail occupiers, mall owners could hang on to their well-performing, smaller tenants and redevelop some of the extra space into apartments.

Such an approach would suck up a lot of square footage quickly, while also providing the remaining mall tenants with a built-in captive audience. No matter where you live, picture your nearest shopping mall. Now imagine you live on-site. How often would you leave the property premises to shop somewhere else? Even if your shopping excursion requires a car, it would be easier and quicker to take a three-minute trip through the parking lot than a ten-minute drive down the highway.

Building residential space into malls offers other advantages, too. Grocery stores could deliver bags of food to runners employed directly by the landlord who could, in turn, bring everything directly into residents’ units. These blended centers could be particularly attractive to older adults, who would benefit from both the proximity to shopping and services as well as the sense of activity that being near a buzzing destination provides. And according to Steve Henenfeld, a retail broker and current executive managing director at Colliers, “Malls are typically located on or near an intersection of a highway or the main street and are well served by public transportation. That puts the residential properties at the center of town, allowing residents easy access to main roads and highway systems.”

Some might think that living in a mall is particularly nightmarish, but well-executed projects could look much like normal mixed-use developments, or manifest as separate residential towers surrounded by well-manicured landscaping, and not just like small apartments crammed into vacant big-box shells. Projects that add residential space to malls are already underway. In a northern suburb of Seattle, Alderwood Mall is developing 300 apartments that will complement the remaining 90,000 square feet of retail space at the property. Alderwood is the product of a collaboration between Brookfield and AvalonBay, titans in retail and multifamily, respectively.

No modern conversation about retail real estate could be complete without mention of the coronavirus. Adding residential space to malls would allow entire populations of people to shop at their on-site stores without having to take public transit or risk infecting another area if they are themselves infected. If things get even worse, it would be possible for on-site retail to close their doors to outsiders, cutting down transmission chances even more.

Bringing people closer to retail is only one solution for the glut of distressed malls across the country. Another solution is to add office space to malls, which similarly cuts down on commuting time since access to shopping would be available immediately after leaving the workplace. Co-working has been a noted supplement at some malls, like those of the large owner Macerich, which partnered with co-working operator Industrious last year. Traditional office space can be a potent, long-term stabilizer for shopping centers, too.

A glitzier solution than adding offices is the transition of mall spaces into entertainment venues. New malls are being built with these uses in mind. Consider the American Dream mall in New Jersey, which has both a ski hill and a water park. For property repurposes, empty anchor stores can provide useful canvases to fill with go-kart tracks, mini-golf venues, and other uses that cannot be replicated digitally at home. Amidst the coronavirus outbreak, some malls are using their parking lots as venues for drive-in theaters, allowing visitors a social distancing-friendly recreation experience.

One other possible addition to malls is distribution space. “With distribution, as long as more and more people are looking to have stuff delivered at home, the demand for space to store goods close to people increases,” said Pauline Hale, Senior Manager for Altus Group. Amazon has taken this approach, building distribution space into malls in places like Ohio.

According to Eli Finkelshteyn, the CEO and co-founder of eCommerce tool Constructor.io, “As Walmart races to catch up to Amazon technologically, Amazon is racing to catch up to Walmart in brick and mortar logistical know-how, as well as physical locations it can use as fulfillment centers for its recent one-day shipping promises. Currently, Walmart is pressing its physical presence advantages and new e-commerce abilities with programs like curbside pick-up, and Amazon knows it needs to gobble up physical locations quickly to catch up.”

Each of these solutions requires its own economic indicators to properly underwrite. Some markets will be well-supplied with housing but undersupplied with logistics space, or vice versa, and it is up to the project developer to understand exactly what is needed in a given market. It’s also up to the developer to acknowledge when a given project would push them too far out of their comfort zone, and when a partnership, as at Macerich or Brookfield, is necessary.

Each of these types of adaptations addresses the oversupply of retail space in the U.S. by combining existing, sustainable retail with other property uses. Whether office, distribution, entertainment, or residential, there are favorable economies of scale to be leveraged by this sort of project mixing. This kind of work could change the fabric of neighborhoods used to viewing the mall as just a place to shop, but it might be just what communities need to keep travel times low, delivery times short, and social distancing high.

By Logan Nagel for Propmodo Research July 15th, 2020

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