One expert says roughly 25% of shopping malls will survive

Shopping malls were in trouble before COVID-19 but add that in and experts suggest many malls will need to shut down or transform:

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Of the roughly 1,100 malls left in America, Kniffen believes only 278 are viable in the post pandemic world where online shopping will reign even more supreme. These would be the best of the best malls — or “A” malls as experts call them — that are in densely populated areas and target higher income shoppers…

The pandemic has just sped up the day of reckoning for vast stretches of zombie retail real estate. America had a glut of retail space before COVID-19, with twice as many square feet dedicated to shopping as any other country in the world. Retail is oversupplied by six square feet per capita compared to Europe, according to the International Council of Shopping Centers for U.S. merchants, a New York-based retail trade group…

In the U.S., 20%-25% of retail spaces will become vacant in the next few years due to the pandemic, Crowe estimates. Half of the malls in America will disappear over time, said Najla Kayyem, senior vice president of marketing for Pacific Retail Capital Partners, a California-based retail investment and management company

In the end, the concept of a community gathering place known as a mall still makes sense, experts believe. But the days of malls simply being stuffed with pizza places, apparel stores and various kiosks are over. COVID-19 hasn’t killed the mall, rather accelerated its rebirth into something far more useful for the modern era.

Such changes could have wide-ranging effects:

  1. This could produce nostalgia for the era of thriving shopping malls. Imagine a lot more television shows and movies portraying life between the 1960s and 2000s featuring the shopping mall as something from a bygone era.
  2. If many malls need to close, what happens to all the debt involving these properties? Someone will be on the hook for this though perhaps some of the problems could be averted if the pace of closings is slower and some malls are reinvented.
  3. Where will people go to gather? While shopping malls were never public spaces, they did provide space for people to be around each other.
  4. This will likely affect different communities in different ways. Shopping malls in wealthier areas will likely have a better chance of survival – continuing to bring in revenue for communities – while malls in other communities will close and communities will struggle to fill the land.
  5. As is noted in the article, this presents a lot of redevelopment opportunities. Will there be a common approach across shopping malls that everyone tries to copy or will this look different from mall to mall?

Looking for buyers for thousands of properties in Black communities in and near Chicago

Even as new skyscrapers join the Chicago skyline, thousands of properties in the Chicago barely attract any interest:

Locations of Cook County property tax 'scavenger sale' properties
Chicago Tribune graphic

County Treasurer Maria Pappas is out with a new report that concludes the 81-year-old program isn’t working. Not enough people are bidding on the properties, she says, and so the parcels often remain eyesores, a deterrent to revitalizing the neighborhoods they blight. That especially hurts struggling Black city neighborhoods and south suburbs, Pappas notes.

“Nobody wants these properties because they are in areas that are losing population, have high crime and aren’t worth the property taxes you have to pay to own them,” said Pappas, who conducts the sales as directed in state law. “So people abandon them.”…

Land Bank officials strongly dispute that notion, saying they’ve done more to return properties to productive use in just a few years than private buyers — often hedge funds making speculative bids — have achieved over a much longer period of time.

They acknowledge changes to the system are needed, and plan to ask lawmakers to approve them. “If the treasurer would like to support the reform of this, we couldn’t be more happy to have her join us,” said County Commissioner Bridget Gainer, who set up the Land Bank in 2013.

Vacant properties are not desirable in any community since they are not generating the revenues they could, whether because taxes are not being paid or the land is not being used in a productive way. Additionally, they are aesthetically unappealing – being often viewed as signs of blight or neighborhood problems – and could attract unwanted activity. Whether it is suburbs trying to fill empty grocery stores or dead shopping malls or communities with fewer economic opportunities looking for redevelopment, vacant or abandoned land is distressing.

This particular ongoing issue in the Chicago area is highlighted even more clearly when land not very far away – perhaps just a few miles and sometimes in the same municipality – is very desirable and multiple actors would want to redevelop it. Even during COVID-19, land in the Loop attracts attention as developers and architects eye property and vie to be part of what is viewed as a desirable area and a good investment.

In the United States, the contrast between the availability of capital and development by location can be incredibly stark. In this case, it is connected to significant residential patterns by race where land and buildings in Black neighborhoods are less desirable. There is land to be redeveloped in Chicago and it can be had rather cheap…but, due to powerful social forces over time, no one has any interest in the cheap land and they would rather continue to fight over and compete in the lucrative areas.

Where shopping mall debt ends up

A story of several traders who shorted shopping mall debt provides insights into financial workings of shopping malls:

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Then, in October 2018, Sears declared bankruptcy, and they decided it was time. Here was the scheme: MP built a position against two slices—called “tranches” in Wall-Street speak—of mall debt with, they thought, a relatively low likelihood of being repaid: CMBX.6 BB and BBB-, which were filled with roughly $2 billion worth of debt, an outsized chunk of which was issued to 39 struggling shopping malls. They bought credit default swaps on the block of debt, which amount to insurance policies on the bonds. If the bonds went completely bust—similar to, say, your house burning down—they would be owed their entire value in cash. But even if the tranches decreased in value, MP’s insurance would be worth more and they could sell the swaps for a profit. In any case, it was an asymmetric bet: the downside risk was confined to what they’d have to pay to hold the insurance, but the potential payout was many multiples of that amount—theoretically in the billions…

Meanwhile, McKee was becoming known on Wall Street as “The Queen of Malls,” and other bearish hedge funds began asking her for advice on shorting CMBX.6. “All I did was talk about malls all day,” she said. This included portfolio managers working for the infamous billionaire activist investor Carl Icahn, who, by the end of 2019, had put on a $5 billion short position, arguably the largest by anyone on Wall Street. This went against conventional wisdom at the time, considering that the value of the mall debt was going up, but once word got out that Icahn had entered the ring, the trade was taken more seriously on Wall Street. “That made a lot of people stand up and say, ‘Hold on, we should look at this,’” McNamara said…

Between March and July, as businesses struggled to pay their rent, CMBS delinquencies, according to Trepp, increased by a staggering 492 percent, the value of the hotly contested CMBX.6 tranches were slashed in half, and the brick-and-mortar retail sector was on the verge of going belly-up. Large retailers like Gap stopped paying rent; Neiman Marcus, J.Crew, Brooks Brothers, Ann Taylor, Loft, Pier 1 Imports, GNC, and JCPenney (among many others) filed for bankruptcy; Victoria’s Secret was closing hundreds of stores and Lord & Taylor announced it was closing its doors for good and liquidating inventory; TJX and Macy’s recorded losses of $5 billion and $2.5 billion, respectively; foot traffic for shopping malls plummeted to basically zero; and, in April, clothing sales fell 79 percent, the largest drop on record. “The economy has declared war on your aunt’s wardrobe,” Scott Galloway, marketing professor at New York University, mused on his podcast Pivot. As for Crystal Mall, Simon Property Group, its landlord, defaulted on the mortgage and is planning on handing over the keys to their special servicer…

COVID-19 also revealed a dirty secret hidden in the crawlspace upon which many commercial mortgage-backed securities were built. A University of Texas at Austin study published in August claimed that banks knowingly inflated underwriting income for $650 billion worth of commercial real estate mortgages issued between 2013 and 2019, including by 5 percent or more for nearly a third of the roughly 40,000 loans. “A well-documented historical pattern is that fraud thrives in boom periods and is revealed in busts,” the university researchers wrote, adding that end investors were unaware of this hidden risk, a deception akin to buying a Ferrari secretly outfitted with a rusted-out Kia engine. It could be argued that CMBS had been a magic trick all along, with big banks one step ahead, luring investors to pick a card from a rigged deck. It took a global pandemic—an act of God—to reveal this financial sleight of hand.

Americans and financial institutions were bullish about single-family homes into the 2000s, until they were not and the housing market imploded. Americans liked shopping malls…and is this a repeat?

Since the story suggests those shorting shopping malls are in the minority, does this mean other investors truly believe shopping malls will successfully reinvent themselves and or redevelop enough to successfully pay their mortgages? Or, are a lot of people hoping that shopping malls make it through?

The default of shopping malls could have a broad effect, particularly on communities that will struggle to fill that space and recapture some of the tax revenue that shopping malls could bring in. More broadly, the difficulties retailers face could impact a lot of people in multiple ways.

Demolish a vacant mall anchor store, build new apartments

The construction of Fox Valley Mall in Aurora, Illinois was important for the suburb, particularly since it was in Aurora and not in Naperville. But, as shopping malls and suburbs change, the former site of Sears at the mall may soon be apartments:

Google Street View, November 2018

The vacant Sears store at the Fox Valley Mall could be razed early next year to make way for a three-building apartment development and kick off a new phase of life for the 45-year-old mall.

Aurora aldermen will vote next week on a request to rezone roughly 11 acres of the property along Route 59 side of the property to allow the buildings.

The buildings, each three stories tall, would have a total of 304 studio, one- and two-bedroom apartments…

A 2020 report for the city said that, including the closed Sears and Carson Pirie Scott department stores, 40% of the mall’s store space was vacant.

Adding residential units to shopping malls is a fairly common suggestion. With retailers in trouble, apartments fill the space more permanently, can address housing issues in communities, and could provide a ready population of potential customers for the nearby mall and other proprietors.

With the proposal working its way through local government, three things are worth watching regarding these apartments:

  1. How, if at all, will the apartments be connected to the mall? If they are completely separate buildings and are not marketed as being right next to the mall, then they could be like any new apartments. But, perhaps the mall is a draw for those who might want to be close to shopping, an indoor walking site, and food options.
  2. What kind of apartments will these be? Given their location, these will probably not be cheap apartments. In addition to being close to the mall, the apartments are near lots of other shopping and dining as well as potential employers, the location is just west of Naperville, and a busy Metra station is just to the north.
  3. How much of the mall will survive within five or ten years? The apartments could help revive the mall area or help hasten its demise.

Roughly 3,500 churches close each year; the fate of all their buildings is unknown

In profiling religious buildings that are repurposed into new and unusual spaces, a New York Times story highlights how many potential religious buildings could be repurposed:

A church turned real estate office in Orland Park, Illinois. Image from Google Street View, August 2018.

But not every flock-less church faces an afterlife as living spaces stuffed full of “exceptional quirks around every corner” for hipsters. Many have become different kinds of creative spaces and communal gathering spots, often providing what might be considered “secular ministry.”

It is unclear how many religious buildings are repurposed. Roughly 1 percent of the nation’s 350,000 congregations — or 3,500 — close each year, based on an analysis from Mark Chaves, a sociology professor at Duke University and director of the National Congregations Study. But not all find new uses and some buildings are filled by different congregations.

The eight subsequent profiles of transformed religious spaces are indeed interesting. And this follows a pattern of news reporting on these conversions: look what cool spaces can be created from church buildings! (See earlier blog posts on converting churches to residences here and here.)

Yet, the paragraphs cited above from the beginning of the story note the need to study the full story of religious buildings. What happens to all the buildings associated with congregations that close? A few guesses based on the research Robert Brenneman and I did in our book Building Faith:

  1. Many of these buildings are reused by other religious groups. These can sometimes be groups in the same religious traditions and other times not. A number of congregations are willing to use an existing religious building and then modify it to their own purposes. This might provide a unique opportunity to acquire a building or location for a cheaper price and/or borrow the tradition in an older structure.
  2. Some religious buildings are converted into other uses. I would guess that the percent of all sold or abandoned religious buildings converted into cool uses – ones that become architectural marvels for other uses or feature the kind of activity to be featured in a newspaper – is relatively low.
  3. Some of these church buildings are eventually torn down. It can be expensive to maintain aging structures. It can be costly to convert old structures. The land may be too valuable to be taken up by a religious building. The building might be in a neighborhood or community with limited resources or declining fortunes.

If the buildings are indeed repurposed, the new owners may or may not keep some of the original features. It is hard to tell exactly from the images with the New York Times story but it looks most of these conversions tried to keep some of the church-specific features like stained glass windows, organs, lighting, and ceilings. This may not be desirable for all uses or even for religious groups reusing the building.

What redevelopment will suburbs pursue with COVID-19 induced vacancies?

The COVID-19 pandemic is accelerating a number of trends already troubling many communities: struggling brick-and-mortar retailers, filling vacant office and commercial properties, and budget uncertainties. What might this lead to as suburbs consider redevelopment? A few possible directions.

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  1. Desirable suburban communities – those with wealthier residents, more white-collar and professional workers, higher quality of life, and stronger economic bases – will do better at attracting and following through on redevelopment.
  2. The “easiest” answer in many suburbs might be to redevelop office or commercial properties for residential units. Given the needs for affordable housing or cheaper housing in many metropolitan areas, many suburbs could fill residential units. They may not want to for several reasons: residences do not bring in sales tax money and services are different for residences, including having more students in local schools. Plus, “affordable housing” implies certain things about the residents and the units that might not be palatable to some communities. But, if the primary goal is to put property to use, this might be the way to go.
  3. Mixed-use redevelopment that combines residential and retail or office space will continue to be attractive. However, these opportunities might be limited to already-advantages suburbs or particular properties that have certain advantages (large enough to create a self-contained community, access to highways and other transportation options, etc.).
  4. Certain properties may just present particular problems. Three come to mind quickly: shopping malls, empty big box stores, and sizable office parks or campuses. A number of communities have tried to tackle each of these (as one example among many, see this shopping mall post here) but the size of the property and their particular configuration present problems. There may a glut of new kinds of suburban properties that present their own issues: restaurants (both sit-down and fast food), strip malls, and movie theaters. Again, the ways the space was initially configured for these specific uses can make it difficult to pursue retrofitting.
  5. Converting private spaces into more public spaces. Imagine the shopping mall to public skating rink or office campus to park. These may have very positive long-term benefits including spaces for civic engagement, leisure, and interaction with nature. Yet, given the state of municipal budgets with COVID-19, it might be very hard to find money to purchase or use what was once private property.

If there are numerous vacant properties in suburban areas post-COVID-19, this will present a challenge for communities. Are there enough uses for these properties? How willing are suburbs to convert land from one use to another as they consider the “best use” for the community?

Finding uses for the “big empties” in the Chicago suburbs

When businesses move their headquarters from sprawling suburban campuses to the city center, they leave behind a lot of building space and land:

Inside the sprawling, 2.4 million-square-foot headquarters — composed of seven interconnected office buildings — there is an almost eerie ghost-town quality, former employees describe. The bank, dry cleaners, hair salon, coffee shop and small sundry shop that once lined the corridor of the main atrium have all closed. Gone, too, are the Sbarro’s and Panda Express restaurants.

Over the years, Sears has hired leasing agents to bring in sublessors without much success. Today, with the economy uncertain and Sears’ days seemingly numbered, the building has become an even harder sell. Only about 3% of the complex is leased to outside tenants…

If Transformco tried to sell the campus, it would face long odds, local real estate experts said. The large complex, custom-built for Sears, is nearly 30 years old. Suburban business parks are as outdated and obsolete as fax machines…

The entire region is a buyer’s market, burdened by other big empties. Right down the road from Sears headquarters are two such examples.

Perhaps the easiest answer to filling these properties is to bulldoze them and build housing on the land. In the suburbs in which these suburban headquarters are located (Hoffman Estates, Oak Brook for McDonalds, etc.), there would be demand for housing.

But, bulldozing buildings adds costs as would changing the infrastructure for the site. Plus, as the article notes, housing would not bring in the same kind of revenue or status that a large corporation did. Additionally, more housing might even lead to a bigger tax burden for the rest of the community if there is more demand for schools and other local services.

Thus, suburbs often hope to find corporate partners for such properties. Finding someone to take over the whole property would be ideal. Or, perhaps create a mixed-use community with some residences but also businesses and restaurants. See more on efforts in Hoffman Estates to transform a former AT&T campus into a “metroburb” (also mentioned in the article).

Side note: this does not bode well for large tech campuses amid a possible shift to more employees working from home.

Addressing “green gentrification”

As American cities develop land in ways to combat climate change, researchers have examined who benefits from the new development:

Fighting climate disasters is a good idea for the planet, but can have unintended consequences for neighborhoods. “In order to construct a green, resilient park or shoreline, we get rid of lower-income housing … and behind it or next to it, you’ll have higher-income housing being built,” says Isabelle Anguelovski, an urban geographer at the Autonomous University of Barcelona who co-wrote an article about green gentrification in December’s PNAS. It can get even worse, she says. Hardening one neighborhood so that water can’t flow inland there means the water goes somewhere else. “The flooding and storm events go into the basements of the public housing next door,” she says.

That’s double jeopardy. And it turns into triple jeopardy, thanks to economics. New amenities plus new luxury housing drive up local housing prices, which drive out working-class and poorer residents. “The question is not only what Boston is facing, which is middle-class gentrifiers with a slightly higher income and education. It’s über-rich people who end up taking over cities until they are unable to fulfill their direct functions,” Anguelovski says. The gentrification wave is its own kind of economic apocalypse. If it hits, none of the people who make a city work—teachers, police officers, health care workers, bus drivers—can afford to live there. “Or it becomes so important from an economic standpoint, so desirable and hardened with infrastructure that entire buildings are empty—purchased by real estate funds or individuals from the Middle East or Russia,” Anguelovski says.

The problem that cities face is the difference between physics and real estate. Climate change happens on the scale of decades or centuries; real estate development and politics happen on fiscal and electoral timescales. “I get it. Green space is great, and while it may not be much of an improvement in terms of climate adaptation, it’s good for people’s well-being and quality of life,” says Ken Gould, an environmental sociologist at Brooklyn College and coauthor of Green Gentrification: Urban Sustainability and the Struggle for Environmental Justice. “Does it sequester much carbon? Not really. It’s fine. But you have to manage the real estate markets, because markets left to themselves, when you put in an amenity, are going to generate development.”…

Obviously, cities are facing more and more climate-related hazards. It’d be policy malpractice to not get ready for them. “It’s not too difficult for a city to make green infrastructure investments in neighborhoods that have been historically underinvested in, but the housing side needs to kick in,” says Constantine Samaras, an energy and climate researcher at Carnegie Mellon University. “The people who live in these underinvested neighborhoods deserve a neighborhood with bike lanes and green space. It’s up to city policy to make sure they can stay.” The trick is to build new housing while not uprooting people who live in the old stock—so that everyone benefits from the protection against disaster, not just a wealthy, lucky few.

This sounds like a twenty-first century version of urban renewal programs in American cities. In the name of the good of the whole community – now to protect neighborhoods and cities against environmental risks – lower-income housing is removed and the land eventually ends up in the hands of wealthier residents and property owners.

The sociological literature on urban development would suggest this is not surprising. Through a variety of means, leaders and wealthier people find ways to procure desirable land and profit from them. Redevelopment, whether undertaken to improve properties or make places greener, tends to benefit those who move into the neighborhood, not the ones who have been there a long time.

As is noted in the portion above, what is good for real estate and property values may not be good for the community even though the changes themselves – such as putting up barriers to water or creating more green space – would be welcome. At least now, the American system tends to privilege the real estate side, not the community improvement and well-being side. What could be done to limit the real estate market for the good of the city? Which city leaders will lead the way in arguing that green improvements should not be tied to market forces?

Imagine the American suburbs shrunk by a factor of five

A comparison of suburbs in Germany and the United States hints at places built on two different scales:

The fact is, my wife’s parents didn’t drive her anywhere because they didn’t need to. Her German suburb looks like an American suburb – shrunk by a factor of about five. The houses are smaller, the lots are smaller, the gardens are smaller, and around most corners are buildings with multiple housing units. It’s denser. That means friends and volleyball practices and first jobs at pizza shops are all closer, and parents can tell their kids to walk or take a bicycle.

For the younger generations in America, that is an increasingly pleasing prospect. Car buying is dropping and a growing share of millennials and Gen Zers is putting off getting a driver’s license or eschewing it entirely. They want to take the bicycle. Add in concerns about climate change among many young Americans (and wanting to limit car emissions), and you get a scenario where density becomes desirable.

Yet most American neighborhoods have been designed with the exact opposite in mind. The expression “your home is your castle” gives some indication of the prevailing mindset since the 1920s, when modern single-family zoning first took hold. Who wants the smallest castle on the block?

So what is happening now, from the D.C. suburbs to California, is a recalibration of what American homeownership should look like. There are other important factors, too. The single-family mentality and its lower density mean fewer places to live – and therefore more upward pressure on home prices. That has meant many people of color have been locked out of the most common way for individuals and families to build wealth. Many young Americans say equity demands greater density.

The argument for denser suburbs is a common one in recent years. Packing in more buildings and housing units in the same amount of land has the potential to allow suburbanites to keep single-family homes (just with smaller yards and multi-family housing would not look as out of place). New suburban development would shift from new homes on the the edges of metropolitan regions and focus instead on filling in existing communities.

I could see this happening in at least three kinds of suburbs:

1. Mature suburbs with little greenfield land for development but there is still demand/interest in more housing. The only way is go denser or up and denser at least preserves the vertical scale.

2. Communities built around significant mass transit options. Transit-oriented development promotes density and less car use.

3. Suburbs with larger populations. More density is likely to be resisted in smaller communities because they can still claim to be a small town. In contrast, large suburbs are already past that point so more density already fits the size of the community.

Then, we might see in a decade or two an altered suburban landscape where certain communities are quite dense and nearby suburbs are in the older mode of single-family homes and bigger yards. Imagine “surban” pockets with sprawling neighborhoods next door. This will provide options for homebuyers but also means mass transportation options in the suburbs will remain uneven.

Looking for productive ways to use the campuses of closed colleges

When college campuses close, what happens to the land and buildings?

Saint Joseph is one of several small private liberal arts colleges across the country to have suffered that fate in recent years. In many of those cases, leaders are left wondering what to do with the shuttered campus. Under the wrong circumstances, buildings can remain locked and quads can lie fallow for years as banks try to recoup unpaid debts or brokers seek buyers who are willing to invest in land filled with outdated or dilapidated buildings…

Conversations between community and state leaders led to a search for partners interested in working with the college. That brought Vermont Works, an investment firm, and Vermont Innovation Commons, a benefit corporation that is a project of Vermont Works, into the picture.

Ideas grew for trying to offer education to a wide range of students, keep Vermonters in the state and attract new residents, Scott said. The direct path from high school through college to employment isn’t necessarily what employers or students want anymore. Professional skills, technical skills and experience are being emphasized much more today than they were in the recent past…

Across the country, the idea of repurposing closed or closing colleges is a critical planning problem, according to experts. College leaders need to be considering their prospects for the future and whether different models can help them fulfill their institutions’ missions, said Nicholas Santilli, senior director for learning strategy at the Society for College and University Planning.

Redeveloping large properties is not an easy task: see shopping malls, big box stores and large retail stores, and office parks. College campuses present their own unique challenges given how the land is used. Simply plopping a new organization into the same set of buildings is likely to be difficult. Location will matter as well; the story above used the example of a more rural college where there is limited demand for land.

As the story hints, it would be great to be able to use the property for an ongoing educational purpose to keep the mission of the college going. If that does not work, perhaps the land could be used for community purposes. Ultimately, simply turning the property back to the free market for commercial, industrial, or residential uses – which could generate more money and taxes for local communities – seems like it could be a loss. Given the predicted fate of numerous colleges and universities, perhaps we will have a landscape in a few decades where it will be hard to know that the land formerly housed a thriving higher education institution.

I wonder if there is a way for college campuses to head off the problem long before they need to close their doors. Would having more permeable membranes between the campus and the community better connect all the land uses? is the impulse to have a controlled campus a bad idea in the long run for communities?