By Glenn Brill, managing director, FTI Consulting Inc.
Despite the growth of e-commerce as consumer expenditures and retailers adapt to omni-channel sales, digital marketing strategies and shifts in consumer behaviors resulting from COVID-19, most shoppers still go to stores.
Eighty-six percent of consumer sales take place in a brick-and-mortar store environment, according to the U.S. Department of Commerce’s second-quarter e-commerce retail sales report. Still, upscale retailers are increasingly consolidating local market share into exclusively Class A retail properties.
Glenn Brill, FTI Consulting Inc.
The death of the shopping mall is widely discussed and perhaps greatly exaggerated; high-end malls continue to find success as upscale consumers unleash pent-up demand and savings accumulated during the pandemic. However, due in large part to stagnant middle-class incomes and the struggles of stalwart anchors of middle-class consumption like J.C. Penney and Sears — as well as the general decline of department stores — many Class B and C malls have been left to compete with each other for declining shares of middle-market tenants in oversaturated markets.
According to CoStar Group, U.S. mall properties had a vacancy rate of approximately 7.3 percent as of August 2021, representing the fourth consecutive annual increase. In an August report, Coresight Research estimated that 25 percent of America’s roughly 1,000 malls will close over the next three to five years.
Should this happen, mall owners and members of the surrounding communities will be faced with the enormous challenge of redeveloping what were once core community assets into viable investment opportunities. Dead malls, or so-called “grey fields,” often possess location attributes (access, visibility) and infrastructure (ring road, storm water management) that inherently give them redevelopment potential.
Creating A Vision
Given the amount of built environments surrounding malls, adaptive reuse is usually the first alternative considered as the shortest course to a solution. But there are only so many call centers, mini-storage facilities and community colleges to go around.
The redevelopment of substantial acreage is, in practice, the application of the core skill set for “horizontal” land development. Opportunity lies in the potential to phase infrastructure improvements, subdivide parcels and recapitalize in accordance with the rollout of a “vertical” master plan and in cooperation with local government. Effectively, the size and scope of a dead mall site presents a tableau for reinvention to support the future needs of a community.
A vision and master plan for future development, created in concert with the local community and municipality, provide a framework for the opportunity to maximize a site’s market and economic potential for investors and the community, as well as fiscal benefits for taxing authorities. To this end, a strategic planning approach is needed to fully understand how the asset can be put back into service as part of comprehensive community and economic development planning.
Understanding Communal Needs
This approach to a creative solution, incentivized in part by a substantial loss of fiscal revenue to the municipality, can build investor, community and government partnerships that pave the way for rezoning and public benefit incentives for redevelopment. While navigating community and government relations can be a daunting exercise, it is in developers’ best interests to build bases of support among investors and local communities for change.
A first step is a community assessment and inventory of planning and development trends. What is now a sea of asphalt needs to be integrated into the urban/suburban fabric as part of a community’s overall master plan. Supportable market demand, compatible land uses and density need to be considered in the context of support of community, economic development trends and the opportunity to capitalize on existing infrastructure and improvements (if possible).
Mixed-use land development — including community services (i.e. hospitality, healthcare or education), housing and extended-day community retail “mash-up” formats — provides a diversified approach to placemaking, town center development, capital planning and joint ventures. Furthermore, it fosters public-private partnerships to help mitigate risk.
It is reasonable to say that any sizable project like a mall redevelopment will receive some public benefit incentives in the form of zoning variances, real estate and sales tax abatements, below-market-rate financing, tax incremental financing, offsite infrastructure improvements and other programs. These public investments help close the gap in investment economics needed to effectively increase the value of land over the course of the project, attract private equity and debt and create attractive returns to investors.
Municipalities measure their returns on investment based on public benefits received, including net fiscal benefits (new tax revenue versus the incremental cost of needed increases in government services) and short- and long-term economic impacts. Such impacts include job creation and increases in direct, indirect and secondary spending in the local community.
The ability to articulate the need for public investment in support of local community and economic development is a requirement for receiving public benefits incentives needed to support a project’s capitalization and operating plans. Successfully securing this support is often the linchpin for attracting private sector investment.
In this regard, the timing for redevelopment and capital requirements need to be aligned with the opportunity and the necessity to receive public benefit incentives to support redevelopment and community objectives. To achieve this goal, a transparent process, including detailed pro forma and technical reports, is required to demonstrate goodwill and the necessity for public investment.
To Sum It Up
The demise of the super-regional mall is symptomatic of change in the local community as shoppers and retailers fail to support the asset. Ultimately, a dead mall must be approached as an opportunity to participate in local community and economic development. Changes in land use can accommodate generational shifts in demographics, development trends and community needs.
Developers need to focus on opportunities to reinvent dead malls as part of larger redevelopment projects that are designed to preserve short-term land values and capitalize on broader long-term community and economic development trends. Change creates opportunity, and the opportunity to partner with local government as part of a broad-based community and economic development plan offers a path to value creation.
Glenn Brill is a managing director in the Strategic and Transaction Advisory Group within the Real Estate Solutions Practice at FTI Consulting Inc. in New York. Contact him at [email protected]. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting Inc., its management, its subsidiaries, its affiliates, or its other professionals. FTI Consulting Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.