A developer describes the difficulty in redeveloping a suburban shopping mall

A developer describes the challenges they face in planning a new future for what used to be Charlestowne Mall in St. Charles, Illinois:

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“The redevelopment of a vacant enclosed mall is one of the most difficult undertakings in real estate development,” he said. “The Wall Street Journal ran an article a few weeks ago describing how none of the options for a mall makeover are easy. Conversions to other uses are complex and capital intensive. Unless there is a great shortage of land in an area, most developers would much prefer to buy land and avoid the expense, time and complexity of tearing down an old mall.”…

He said the challenge is to figure out how to redevelop the mall in an economically feasible way that pays for an estimated $35 million in redevelopment costs while maintaining the existing commercial uses during reconstruction and satisfying the city’s desires for something that will serve the needs of the residents of St. Charles.

The developers plan to initially foot the bill for those redevelopment costs. But to make the project financially feasible, he said a tax increment financing district will have to be put in place…

“A tax increment financing district must be established to pay over time for the estimated $35 million cost of demolition and reconstruction of site improvements that are necessary to accommodate many uses for the property,” he said. “This is exactly the purpose for which TIFs were created. Without a TIF, the redevelopment of the mall is not financially possible.”

In addition, he said a revenue stream must be created to pay for the project’s costs. After analyzing the situation, the developers said the revenue stream must come primarily from real estate taxes generated from at least 500 residential units.

The American shopping mall is in bad shape. Redevelopment ideas have been circulating for years and malls have added restaurants, entertainment options, and housing. But, as the above suggests, this is not necessarily an easy task. Shopping malls were supposed to be good for communities, providing shopping, a place to gather, and tax revenue. Redevelopment offers the possibility of a brighter future but it requires work.

It is not surprising to hear that a developer wants help in redeveloping the property. This will help them make money. It is common practice in many communities to offer such help, particularly for important properties. At the same time, this property has some value. Malls are typically located on valuable land, often at the confluence of major roads and adjacent to other shopping and restaurants but also possibly near housing. Would a TIF and other incentives make sure the developer sees a profit or has a bigger profit?

Considering this proposal is part of a long process. See earlier posts about the troubled Charlestowne Mall here and here. Trying to revive a mall, finding a developer to significantly alter the property, and then seeing how it all works can take years. This particular mall may only be in the relatively early stages of this with years to come before residents and visitors see a transformed location.

Sears in Illinois began as catalog, became a department store, and ends in a suburban shopping mall

Sears has come to the end of the retail road in Illinois at Woodfield Mall:

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The last Sears department store in Illinois, which closes Sunday in the Woodfield Mall nearly a century after the retailer opened its first store ever in the Merchandise building, looks very, very…beige right now, in its final hours. Like beige on beige. Like the color of back-to-school Toughskins in 1974, the color of your uncle’s Corolla in 1982 and the color of linoleum at the DMV in any decade.

It opened the same day that Woodfield — named for Sears executive Robert Wood and department store magnate Marshall Field — opened in 1971. It was the largest Sears then, boasting 416,000 square feet of sales floor. From the looks of it in late 2021, it’s hard to imagine anything changed in 50 years…

At its peak, Sears, once the largest retailer in the country, had 3,000 locations, so naturally this Woodfield store is far from alone. Also dead after Sunday are Sears department stores in Pasadena, California; Maui, Hawaii; and Harrisburg, Pennsylvania. Long Island recently lost its last Sears department store; Brooklyn loses its last Sears on Thanksgiving Eve.

Indeed, seeing a Sears department store still serve as the anchor for a large mall right now is like a window into just how stormy and unmoored from the 21st century the American shopping mall has become. Sears sits at the south end of Woodfield, while JC Penny is at the northern end; Macy’s and Nordstroms occupy port and starboard sides.

There is a lot that could be lamented here (and is suggested in the piece): the experiences of many shoppers and employees, the connection of Sears and Chicago, bustling shopping areas now languishing, memories of earlier eras.

I find it interesting that the last Sears department store in Illinois closes in a shopping mall. And this is not just any mall: this is Woodfield, one of the largest in the United States, center of the fast-growing edge city Schaumburg. Department stores hit their stride in central business districts in the United States where rapid urbanization helped fuel consumer activity. But, the geography of business shifted as the population shifted to the suburbs. Department stores continued but now as anchors for a full range inside shopping experience primarily accessible by car. While suburbs are still growing, shopping malls are struggling and the fate of their department stores have both contributed to this decline and been affected by it.

The Internet may have hastened the decline of department stores but I wonder how much the move to the suburbs already weakened them. Stores need shoppers and it makes sense to move department stores closer to those shoppers (and other consumption opportunities). At the same time, the department store in a mall is different than the multiple floor downtown department store. Thinking along the same lines, how different are local stores, Sears, Walmart, and Amazon over time – which is the bigger jump and which factors mattered the most for the shift?

Thinking ahead, could the experience be recreated by putting a new Amazon store in the same spot? The location and infrastructure of the current setting is hard to beat. Shopping in person is still an important experience for many people even with Internet sales.

“The suburbs are going to be hot” – but shopping malls maybe not?

The CEO of Simon Malls is bullish on suburban real estate:

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Adding to the pressure has been the migration back to city centers of a segment of the country’s affluent people. But David Simon, son of the company’s founder and CEO, said on a conference call with Wall Street analysts Monday evening that trend had been overblown.

“All of the urbanization two, three, four years ago, the question was, Why are the suburbs going to exist? Everybody is going to live in urban environments, yada, yada, yada,” Simon said. “I’m telling you the suburbs are going to be hot, and our quality real estate is going to be where the action is.”

Putting aside data proving the rebirth of city centers over the last 20 years, even if there is a boom in the suburbs that are home to Simon malls, the bigger question is whether the developer can reinvent those properties adequately given retail’s changed landscape…

For now, Simon seems to be holding its own. After a difficult spring in which many of its tenants, notably Gap Inc., withheld rent while stores were closed for weeks on end, Simon has collected 90% of billed rent for the past three quarters. The company reported today that it has given tenants about $400 million in rent abatements and another $310 million in deferments.

It will be interesting to see how this plays out. Multiple issues need to be resolved:

  1. Can the retail market steady or rebound? Will the problems of COVID-19 keep going or permanently push shoppers to online platforms?
  2. Can malls both shift their focus from retail to other uses, including food, entertainment, community spaces, and residences, quickly enough even as they search for the magic formulas that will keep people coming in?
  3. Will many malls face big problems while some in wealthier areas and with deeper pocketbooks survive?
  4. Might a growing suburban population boost the chances of all malls?
  5. Is the shopping mall a destination of the past? For a few decades they were an exciting place but now no longer have the same buzz.

Given all of this, I would not be so optimistic. Perhaps Simon has a big plan and thinks it can revive their malls. If people are interested in the suburbs again, there might be a glimmer of hope: make some strategic changes at certain malls, become a destination in a way that single-use suburban properties cannot easily match, and try to capitalize on land that could be valuable because of its location.

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?

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.

Filling empty shopping mall space with Amazon

Amazon might be coming to a shopping mall near you:

group of people walking inside building

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The talks have focused on converting stores formerly or currently occupied by J.C. Penney Co. Inc. and Sears Holdings Corp., these people said. The department-store chains have both filed for chapter 11 bankruptcy protection and as part of their plans have been closing dozens of stores across the country. Simon malls have 63 Penney and 11 Sears stores, according to its most recent public filing in May…

Amazon fulfillment centers wouldn’t draw much additional foot traffic to the mall, though some employees could eat and shop at the mall. That is why landlords have preferred to replace department stores with other retailers, gyms, theaters or entertainment operators. Yet many of these tenants are struggling to survive during the pandemic and aren’t in expansion mode.

Simon would likely rent the space at a considerable discount to what it could charge another retailer. Warehouse rents are typically less than $10 a square foot, while restaurant rents can be multiples of that. Depending on when the leases were signed and their locations, department-store rents can be as low as $4 a square foot or as high as $19 a square foot…

Malls’ strategic locations often make them attractive as distribution hubs. Many are near main highways and residences. Amazon has already acquired the sites of some failed malls and converted them to fulfillment centers. FedEx Corp. and DHL International GmbH have done the same.

Dying shopping malls need businesses willing to rent space. But, as the article notes, Amazon is an odd choice: they are partly responsible for the decline of traditional retailers, they may or may not bring in customers for other businesses, and they can ask for lower rental rates. But, what choice do many malls have?

I am trying to imagine former shopping malls that become Amazon centers with more life to them than the typical warehouse setting. The former department stores and other retail spaces can mimic large warehouse spaces while the walkways, fountains and other features, and occasional other tenant provide variety and recreational space for employees. Think tech campuses with a warehouse/shopping mall feel. Or, go further: as shopping malls consider adding residential space, why couldn’t Amazon convert some of the mall space into living quarters for workers? (Perhaps this also lends itself to dystopian visions.)

Not mentioned here: how local governments would like the conversion of retail or restaurant space – good for sales tax revenue – to warehouse space.

Millions of dollars flying out of the King of Prussia Mall

Recently walking through the King of Prussia Mall at Christmas time, I was struck by multiple sights: the variety of shoppers, the Christmas cheer and decoration, and the number of possible activities in and around the mall. Yet, none of these could compete with my biggest realization that day: just how much money was flowing in and out of the mall.

The King of Prussia Mall is one of the biggest in the United States , is in the top 10 of malls by sales, and it helps anchor an edge city roughly twenty miles northwest of Philadelphia. It is a site to behold, particularly after an addition a few years ago that connected the two halves of the mall and added a new row of upscale retailers.

But, the biggest goal of the mall is to generate sales and profit. And it looked like the mall was doing just fine on the day I visited. Many shoppers had bags on their arms or strollers. Multiple stores I went into, ranging from smaller retailers to large department stores, had people perusing the racks and shelves. The type of stores at the mall and the people aiming to go into them also hint at the money consumers were willing to spend. With each American estimated to spend a little over $900 on Christmas gifts, the King of Prussia is a good place to spread that cash around.

The commercial activity around Christmas at this mall also hints at the future of shopping malls in the United States. Some malls might last longer than people think, particularly those located in wealthier areas and with a concentration of wealthier stores and a variety of opportunities (retail ranging from Dick’s Sporting Goods to Nordstrom’s to Primark and including restaurants and entertainment). The King of Prussia Mall is a destination mall, likely drawing visitors from a wider region than most malls.

And with all that money flowing around the mall that day, most people looked happy to be spending and enjoying the sights. I suppose those with fewer resources or anti-capitalists might not go to such an upscale mall in the first place but the whole scene looked like an advertisement for capitalism: spend freely in an impressive mall at Christmas time. What could be more American than that?

Two criticisms of “The Death and Afterlife of the Mall”

I enjoyed watching “The Death and Afterlife of the Mall” from The Atlantic. In a little over five minutes, the video presents a short history of the shopping mall and its impact. The connection between malls and suburbs is hard to argue; few other institutions or settings better exemplify post-World War II suburban life.

At the same time, I had two quick critiques of the ideas in the video.

  1. The overarching narrative of the video suggests malls are part of a larger mistaken American project. Early in the video, James Fallows says, “After World War II, there was this misguided ideal of the suburban goal for American life with people moving away from cities.” Later in the video, I believe it Fallows saying, “The dream of modern life is not a mall-centric, car-centric dream anymore.” These are both contestable statements. As of today, a good portion of Americans still appear to like suburban life (or at least dislike the alternatives more). Perhaps we have reached peak suburbia but this does not necessarily mean the American Dream has significantly shifted to more urban or denser communities. Furthermore, the dream of suburban life has deeper roots than just the post-war era and will likely hold on for decades more.
  2. Are all malls dead? Many are in trouble. Yet, there are two big caveats to this. A number of malls are pursuing redevelopment projects ranging from adding restaurants to public facilities to residential units. Depending on the particular project, the mall footprint may still be prominent or the shopping element may never disappear even as the use of space changes. A second caveat is that shopping malls in wealthier areas may just survive and even thrive as rival malls close down. Americans still like to shop, they still drive a lot, and they occasionally like to venture into spaces where other people are there.

 

Chicago suburbs without property taxes – but perhaps not for much longer

In a region known for high property taxes, at least a few suburbs outside Chicago have no property taxes:

A town of about 40,000, Carol Stream managed to avoid a property tax even when another outlier, Schaumburg — a village with a much larger retail base — took the leap during the Great Recession.

But officials say Carol Stream is facing significant budget pressures from rising pension costs. If it maintains the status quo, projections also show the village would exhaust capital reserves during the third year of a five-year plan for roadwork and infrastructure projects…

In Oak Brook, another town that doesn’t charge a property tax, candidates in the last mayoral race took stock of the financial challenges from flat sales tax revenues. Carol Stream also saw a 2.4% drop in sales tax dollars — the village’s largest revenue source — from calendar years 2017 to 2018.

Suburbs have multiple ways to reduce or eliminate residential property taxes. Sales tax revenue can come from shopping malls, big box stores, and other retail options. Schaumburg and Oak Brook have sizable shopping malls surrounded by many more retailers. Communities can also seek out industry; Carol Stream founder Jay Stream intentionally set aside much land for industrial parks (which are still there). Some suburbs would not like this as industry could conflict with an ideal of quiet neighborhoods of single-family homes.

The article suggests these suburbs with no property taxes will have to reconsider because of declining sales tax revenues and rising pension costs. Given the fate of shopping malls and the problems facing retailers, even in successful malls in wealthy areas like in Oak Brook and Schaumburg, communities need additional revenue.

Suburbs typically do not have the ability to quickly counter declining sales tax revenues. In order to not have property taxes in the first place, certain decisions had to be made long ago. Then, later decisions build within a framework of no property taxes. Making changes to land use takes time for study, approval, development, and then reaping benefits. A suburb cannot say it wants to bring in more sales tax revenue and line up a set of retailers operating within a year.

The fate of these suburbs will be worth checking in five years to see whether they can hold on against levying property taxes.

(Reminder: this does not mean residents in these communities do not pay any property taxes. Rather, their suburbs do not collect property taxes even as school districts and other taxing bodies do.)