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Mall’s End

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Mall’s End

What will retail look like without stores? November 23, 2018
Economy, finance, and budgets

Retail is in a more precarious position than at any time since sociologists began documenting urban change. The sector’s struggles come at a particularly unfortunate moment: with renewed interest in the aging architecture of long-neglected urban centers, more people are moving to districts that seemed on the brink of abandonment a quarter-century ago. In tandem with urban revitalization, suburban shopping centers have upgraded so that they can compete, delivering well-landscaped, finely wrought retail plazas to supplant the squat, ugly monoliths of yesteryear. But the mass closure of national retailers is devastating shopping centers old and new. The result: even amid a surging economy, the vacancy rate at super-regional malls rose to 8.6 percent in the second quarter of 2018—the worst rate since the third quarter of 2012, when the national and global economy were still reeling from the Great Recession.

Before the Internet, in-person shopping proved essential to bringing people to distinct locations. What will happen to American landscapes—suburban, rural, urban—if we no longer have places to shop? And what will happen to all those buildings, when the tenants that once populated them have moved out?

Pundits have analyzed how much the implosion of suburban shopping corresponds to the retreat of middle-class purchasing power. The best-performing malls are typically upscale—those that boast a Nordstrom, Macy-owned Bloomingdale’s, or Saks Fifth Avenue—while major retailers on the budget end, such as Walmart, T.J. Maxx, Ross, and even Dollar General, seem to be holding their own. But the crisis extends across all strata, as struggling Whole Foods and Payless Shoes can attest. Even Nordstrom’s outlook appears increasingly hazy, while Lord and Taylor sold, downsized, and most recently decided to close its Fifth Avenue flagship. Some of the most prestigious blocks of midtown Manhattan are grappling with double-digit vacancy percentages. The idea of shopping in brick-and-mortar stores as a democratic pastime seems to be dying.

Americans have fallen in love with the convenience and predictability of online purchasing. The affluent may remain suspicious about making luxury purchases without seeing a product firsthand, but the most nimble of online retailers increasingly adapt to the 2D interface of a screen, endowing their merchandise with vivid descriptions, photographs, and simulations of what it will look like draped on the shoulders of the prospective buyer. The one characteristic of a transaction that online retail has yet extensively to provide is access to credit—a primary reason that lower-income shoppers may remain dependent upon bricks-and-mortar for years to come.

But the consumer’s growing distaste for running errands does not augur well for retailers with sizable real-estate holdings. How can Macy’s, Kohl’s, Dick’s, and Best Buys retain viability with all those storefronts? What about the niche tenants, like Bath and Body Works, Spencer’s, and Lane Bryant? Many of the ancillary stores that dominated the hallways between mall anchors—the “in-line tenants”—are struggling just as badly, leaving mall managers like GGP Inc. and Simon Property Group clamoring to fill space and depending increasingly upon less credit-worthy, localized tenants to replace the formerly reliable national brands.

The decline in shopping as a social undertaking has become visible even to the untrained eye. Virtually every American metro has lost at least one regional mall (between 400,000 and 800,000 square feet in gross leasable area, according to the International Council of Shopping Centers). Forgotten strip malls—with their peeling paint, faded signage, and pockmarked parking lots—are now commonplace, though until recently, the commercial-development industry attributed these failing sites to their inability to modernize and to the declining economic fortunes of the surrounding communities. Until the mid-2000s, developers kept churning out new shopping centers because customers gravitated toward that fresh look, rendering the 15-year-old strip mall two miles down the road obsolete. Now, the industry has caught on that even the glitziest retail centers are risky. A sizable $90 million proposal off of a highway in the middle-class suburbs of Indianapolis, for example, has stalled a year after its announcement, because the developers can’t secure enough pre-leases. A mixed-use project in suburban Milwaukee can’t get the financing that it needs to proceed through municipal approvals. Even the largest metros are reporting shopping-center construction approaching historic lows, while former mainstays like Sears, Kmart, and even the generally well-run Target are welcoming their scant visitors with rows of empty shelves. Vendors lack confidence that Sears will be able to sell their merchandise or pay off its monumental debts—a condition worsened by the legacy retailer’s recent Chapter 11 filing. The only major asset that Sears can claim (and a dubious one at that) is its real estate holdings, but the actual consumerism that used to take place in these boxy stores has dwindled to nearly nothing.

The most telling evidence of the apocalypse: enclosed-mall construction has all but stopped. The Mall at Turtle Creek in Jonesboro, Arkansas, constructed in 2006, was one of the last built for nearly a decade. (It prompted the near-immediate demotion of the city’s previous hub into “dead mall” status.) Subsequent malls constructed in the last few years—all luxury—prompt the question: “Will this be the last?”

Profitable malls still outnumber failing ones, but how much longer can that continue, if such a high proportion of retail districts must contend with vacancy rates above 25 percent? If Sears completely folds, it’s reasonable to imagine that the status quo for malls will be at least one vacant anchor tenant.  Long before the current apocalypse, analysts knew that the United States, coast to coast, suffered an oversupply of leasable space. Most estimates place it well above 22 square feet per capita—nearly 10 square feet more than Canada (the next-highest) and over double the rate in Australia (number three).

Why is the superfluous construction of retail so much more prevalent in the U.S. than in culturally similar countries? The answer may have to do with the legal environment in which American land development operates. Site access is so easy that a pair of retirees can purchase a corner lot and turn it to a strip mall to help finance their grandkids’ college education. Municipalities are eager to expand roads, water, and sewage systems to service new commercial developments because they offer a bonanza of taxable real estate, much superior to residential development. So they zone land to encourage commercial development far beyond the likely consumer need. Lastly, retail follows rooftops, so commercial developers home in on any newly approved housing construction. American cities have decentralized across higher land area than their Western-world counterparts, making the conditions more amenable to retail construction.

But these top-down explanations offer an incomplete understanding of what drives our rapidly-cycling retail environment. We crave novelty, and quickly reject the old when the next new competitor sprouts nearby. American shopping centers degenerate quickly: federal depreciation schedules usually anticipate a profitable life for retail centers of just 15 years. Thanks to incessant new construction, the U.S. has led the world for decades in devising new retail concepts: the open-air lifestyle center, the tourist-oriented festival marketplaces, the mixed-use town centers, and—perhaps least appealing aesthetically—the power center or retail park, which takes the combination of stores in an enclosed mall and turns it outward, placing a parking lot in a perimeter of shopping strips. However innovative these “mall-ternatives” might be, they are just as likely to dwindle in value as they grow older, especially when their primary tenants—Macy’s, Sears, Gap, Payless Shoes, and so on—continue shuttering stores. The scaling back of the commercial-construction industry cannot begin to halt the exodus from these establishments. We have always had too many shopping centers.

With abundant evidence that brick-and-mortar retailers are struggling, a question looms: what will happen to all this commercial real estate? While this may prove disastrous for commercial real-estate investors, we’re witnessing a market-driven correction in oversupply, as well as renewed inventiveness (or desperation) with the existing portfolio. Developers have long offered creative reuse of repurposed warehouses and textile mills; they’re doing the same with suburban shopping centers. Just as most metros harbor a dying mall, they also routinely host retail relics from the 1960s and 1970s that enjoy a second life as something completely different. Among the oldest is the Jackson Medical Mall, which, during its heyday, lacked the word “Medical” in its name. This original mall of Jackson, Mississippi thrived through most of the seventies but faded after competitors opened in the southwest and northern suburbs in 1978 and 1984, respectively. As is typically the case, the neighborhoods surrounding the Jackson Mall declined, leaving a nearly vacant campus by the end of the eighties. A prominent local physician toured the yawning corridors in 1995 and conceived of the facility as a multidisciplinary health-care complex targeting the underserved. State and private financial backing combined to inaugurate the Medical Mall in 1996, which still serves the community two decades later as a comprehensive ambulatory health-care facility.

Another prominent effort to repurpose a mall has proved less enduring. Euclid, a Cleveland suburb, suffered the decline and ultimate closure of its namesake mall in the early 2000s, but, under new ownership, the property morphed into a center of over 20 different churches, with each house of worship occupying a former storefront: Grace and Mercy Church of the Living God in a former Foot Locker, Crown of Life in an old Fashion Bug, and so on. At its peak in 2013, the property sprung to life each Sunday, but while this activity helped sustain a few local boutiques, it failed to entice new retail tenants. The energy of the pulpits didn’t permeate the mall, and the lease agreements from all these ecclesiastical startups failed to cover maintenance and upkeep. By late 2016, the city closed the property due to safety concerns and tax delinquency. Ironically, Euclid’s planners and economic development strategists have repositioned the site for use as an industrial campus—its original function, before the Euclid Square Mall broke ground in the mid-1970s. Doubly ironic is that the most likely occupant of the old mall site is a customer-fulfillment center for Amazon—among the most powerful forces speeding the retreat of retail. It’s the Internet giant’s second committed location for the Cleveland area; the first, confirmed a month earlier, will occupy the former Randall Park Mall, 15 miles to the south, another casualty of the early 2000s. The 850,000-square-foot facility is accepting applications in anticipation of a fall opening.

As evidence that contemporary mall death can take place even in economically vibrant areas, prosperous Austin—routinely ranked as the country’s fastest-growing city—could not prevent the decline of its Highland Mall. Tenants began departing in the mid-2000s, and a formerly middle-class area of the city began to struggle. Austin Community College, which already owned considerable property nearby, worked with the city in 2014 to win public approval for bond initiatives that allowed a comprehensive reinvention of the vacant mall, lighting up the least-inviting interiors and transforming the vast property, centered around a shuttered JC Penney, into a multi-purpose shared workspace. The facility is home to digital media, culinary arts, and regional workforce development—essentially an extension of the community college’s learning environment, with business-incubation initiatives to supplement the mix. The Highland campus remains in its early stages, but it has already attracted a cloud-management company, and Austin Community College wants to introduce mixed-use development (residential and commercial) in the excess parking spaces that surround the old mall.

ACC Highland, a mixed-use workspace on the site of the former Highland Mall, in Austin, Texas

Most visions of retail’s future focus on damage control, mitigating the pain of loss, and letting the strongest commercial sites prevail. Yet no proposed remedies suggest a recovery of bricks-and-mortar retail. That era is over. For most people, online shopping is superior.

The retail landscape of the future may be hard to imagine at this point. Civic leaders must get ahead of the curve and contemplate a regulatory environment that gives developers the flexibility to envision a variety of solutions on existing sites. For the stable but threatened malls—the Class B spaces—zoning regulations should encourage higher-than-average density, pedestrian-oriented design, and a mix of uses to invigorate those oversized parking lots. After all, most healthy retail corridors—urban and suburban—cater to a higher density of people and a greater diversity of land uses in a relatively constrained space. Younger generations increasingly prefer to live within walking or biking distance of entertainment—a naggingly vague category that often involves food and drink but does not yet exclude shopping (though it increasingly excludes errand-running). If zoning ordinances allow only a single land-use and a restrictive maximum floor-area ratio (FAR) on a property as vast as a mall, the municipality is legislatively stifling opportunities for the kind of reinvestment that could save livelihoods, maintain surrounding neighborhoods, and protect the assessed value of taxable real estate that pays for school districts and municipal public-works initiatives.

Meantime, retailers who ignore shifting consumer tastes are committing slow-motion seppuku. The Internet is satisfying a modern craving for convenience. Therefore, the physical storefront must offer an experience that point-and-click shopping cannot replicate—possibly through aesthetics, unprecedented expertise in customer service, state-of-the-art technological diversions, or the daunting challenge of reinvigorating shopping as a sociable, leisure activity. Few businesses have found the right blend, since few can subsist on impulse purchases by lackadaisical passers-by. IKEA seems to have perfected the hybridization of a furniture showroom with an amusement park, and it remains a cherished destination, but Cabela’s attempted much the same approach for outdoor sports, to no avail; it succumbed to a merger with Bass Pro Shops last year. The niche showroom Pirch strove to replicate the IKEA model for the upscale buyer, but it receded back to its original California locations after faltering during a brief ten-store expansion. Simon Property Group is attempting to court new businesses by nudging them in the opposite direction with its new platform called The Edit: helping incubate e-commerce startups from virtual to physical space, using lease-free, pop-up, and shared space to link fledgling retailers with heavy foot traffic.

In the end, we can safely conclude only that the experience of shopping—and how the purveyors of goods release their products into the commodified wilderness—is more variegated than ever. Malls are merely the largest, most visible casualty. As in the past, the most specialized buildings—those tailored for only one use—are the most likely candidates for obsolescence and eventual abandonment. Malls may prove only marginally more adaptable than geodesic domes. If we can’t convert them to warehouses—the supreme retailing use of the modern era—then how many haunted houses, trampoline parks, or indoor hydroponic gardens do we need? If current trends continue, in which virtual malls trump actual malls, the Plaza at Woodfield Glen (or substitute any other generic name) may someday survive only as a miniature model in a glass display, alongside other relics, like a Sears catalog—or a mannequin.

Photo by Spencer Platt/Getty Images

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