The Mall of the Future Will Have No Stores

When Starwood Capital Group LLC bought Fairlane Town Center in 2014, the investment firm had a lot of work to do.

The Dearborn, Mich., mall was only 72% leased, and among the vacant space was a sprawling former anchor store.

A chance call to Ford Motor Co. to sell some mall advertising turned out to be a game changer. In April, Ford moved its entire engineering and purchasing staff into space once inhabited by department-store chain Lord & Taylor. Ford is now the mall's largest tenant, with 240,000 square feet of space.

"Our relationship began as good neighbors," said Michael Powers, senior vice president of leasing at Starwood. "Then we found out they were in the market for office space. It was somewhat serendipitous."

As retailers close bricks-and-mortar stores at an accelerating pace, shopping-center landlords like Starwood Capital are facing a vexing question: What to do with all this empty space?

Their solutions are varied but all have a common element: reducing, or even eliminating, retail from the equation.

Some landlords plug empty spaces with churches, for-profit schools and random enterprises while they figure out a long-term plan. Others see a future in mixed-use real estate, converting malls into streetscapes with restaurants, offices and housing. And some are razing properties altogether and turning them into entertainment or industrial parks.

Ford's 10-year lease at Fairlane Town Center "brought 1,800 to 2,000 employed people to our property, people with a paycheck," said Mr. Powers. The mall, which is still anchored by Macy's, J.C. Penney and Sears, is currently 91% leased, he said, and its food operators are doing better in the daytime than they did before, as Ford workers pile in for lunch.

Ford liked the mall's proximity to its main facility in Dearborn, which is being rebuilt over the next 10 years, and its wide open spaces.

"We didn't move walls, didn't change anything in a significant way," said Dave Dubensky, chairman and chief executive of Ford Land, the company's real estate arm.

A construction binge in the 1980s and '90s left the U.S. oversaturated with malls. Growth in online sales and declining demand for full-priced goods are causing retailers to shrink their store fleets and divert resources to e-commerce platforms.

In all, retailers have announced 2,880 store closings from January to April 6 of this year, more than twice as many as in the same period a year earlier, according to Credit Suisse. For the full year, the investment bank anticipates more than 8,600 stores to close. Analysts predict that 400 or so of the roughly 1,100 malls in the U.S. will close in the coming years.

Many mall owners are trying to liven up the experience, bringing more dining and entertainment tenants and eschewing the traditional mix of middling food courts, fashion retailers and department stores.

"The appetite for experimentation is there," said Matthew Billerbeck, a Seattle-based senior vice president of design and architecture firm CallisonRTKL. "The industry had gotten complacent and formulaic."

One strategy is to convert enclosed malls into open-air properties that landlords call "lifestyle centers," with apartments, theaters, grocery stores, medical offices and other conveniences -- and much less retail.

In Arlington, Va., landlord Forest City Realty Trust is redeveloping Ballston Common Mall by knocking down the main entrance to create a plaza, removing two-thirds of the roof and installing more windows to create wider vistas of open spaces. The Cleveland-based real-estate investment trust is also building 406 apartments linked to the mall.

"We're turning the mall inside out," said Will Voegele, senior vice president at Forest City Realty Trust. "We don't want a building with its back turned to the street."

The firm is converting what was once Macy's furniture store on the third level of the mall into a gathering space for residents, including outdoor patios, seating and landscaping. Its tenant mix will feature more food options and street-facing retail.

At the Staten Island Mall in New York City, shopping-center real-estate investment trust GGP Inc. is adding 235,000 square feet of space in an expansion expected to be completed next fall. Entertainment operators such as AMC theaters and Dave & Buster's will take up 54% of the space, while food tenants including Shake Shack will account for 20%. Apparel tenants such as Zara will make up just 17%.

The remaining space will be taken up by home-furnishing and personal-care shops as well as other enterprises such as Apple Bank. Discount supermarket operator Lidl will open there soon.

In GGP's holdings of more than 130 shopping centers, apparel takes up half of the portfolio by gross leasable area. Food has risen to 13% from 6% and is projected to go to 20% by 2025, said GGP Chief Executive Sandeep Mathrani in a recent earnings call. Apparel will fall by another 10% or so by the fall, and stabilize at around 40%, he said.

Sometimes developers conclude that the only way to save a dying mall is to level it and start over.

The City Center mall in downtown Columbus, Ohio, was a community centerpiece where pop bands such as Hanson performed in the 1990s.

But the 1.25-million-square-foot mall started to deteriorate as competition from shopping centers such as the Mall at Tuttle Crossing, Easton Town Center and Polaris Fashion Place increased.

City Center's anchor department stores, Lazarus, Kaufmann's and Jacobson's, closed in the 2000s, and vacancy rates jumped to 75%.

The city in 2007 sued the owners for the mall and sought to evict them, accusing them of neglecting the property. The city purchased the property that year in hopes of redeveloping it, but closed it in 2009.

"We looked at 10 different redevelopment plans," said Guy Worley, chief executive and president of Columbus Downtown Development Corp., a nonprofit development firm. "It was built to be a mall and nothing else."

So the city "surgically demolished" the property over a two-year period to retain the underground parking structure, which was still used by workers downtown. In 2011, Columbus Downtown opened a park in its place called Columbus Commons, which has a performance space, two cafes, a carousel and bocce courts.

The park has spurred development around its perimeter, mostly office and residential, and hosts more than 200 events annually. The flagship Lazarus department store, which had been linked to the mall, is now an office building.

Taking some inspiration from parks and high-street retail in New York City, Mr. Worley said Columbus Downtown is looking to add restaurants and art galleries along the streets a block away from the park, preferring to keep the park-facing buildings for residential use.

While there have been no pure retail property projects around Columbus Commons, some retail stores are coming onboard that are "more organic, not national retailers," he added.

"Retail is coming back," he said, "but it's following residential."

(END) Dow Jones Newswires

June 12, 2017 08:14 ET (12:14 GMT)