Incorporating multifamily properties as part of a development that may also include retail, hotel or other components is nothing new. But the strategy is getting a fresh look from retail owners as malls aim to stay competitive in the face of new challenges brought on by COVID-19.
“COVID-19 is accelerating the trends that have been going on for years, namely the densification of assets through the redevelopment of properties, which are often on single-story retail centers or low-rise office sites,” said Katie Bucklew, vice president of mixed-use at AvalonBay. “There will be new opportunities that emerge as retailers continue to close stores, but store closures are only one piece of the puzzle.”
Repurposing underperforming malls with multifamily was happening long before anyone had ever heard of COVID-19, notes David Senden, principal at KTGY Architecture + Planning. However, he thinks the virus has been an accelerant that might make retailers give up sooner. That will lead to earlier lease termination and more opportunities for larger-scale master planning and bigger thinking related to whole mall sites.
“Historically the trouble with mall renovation/repurposing has been long leases and the ends of leases being at different times, so a piecemeal approach has been necessary,” Senden said.
Coping with COVID-19
Like other malls, the Connecticut Post Mall in Milford, Conn., has had to compete in recent years with the convenience of 24/7 online shopping—and now, in 2020, the COVID-19 closures have further interfered with business as usual.
In an effort to stay one step ahead and enhance their property’s long-term success, Centennial Real Estate Co. has proposed adding a luxury multifamily component with 300 apartments to Connecticut Post Mall in Milford, N.J. “If we don’t do anything about it, we’re going to end up in trouble and this is our first step in terms of trying to revitalize the property,” said Jon Meshel, senior vice president of development, in an August interview with News 12 Connecticut.
Based in Dallas, Centennial is part of the consortium that purchased the mall from Westfield Corp. in 2015. Other owners include Montgomery Street Partners, the real estate investment affiliate of Blum Capital Partners and USAA Real Estate Co. Adding offices to the Connecticut Post Mall is another option for ensuring its continued relevance, but Centennial’s research has shown that housing is the best opportunity for reinvention. Plans are currently on hold while community concerns and zoning issues are addressed
At another high-end property, Hawthorn Mall in Vernon Hills, Ill., Centennial is exploring an upscale multifamily component as part of the redevelopment of the 47-year-old super-regional mall. Announced in March 2019, the plan designed by KTGY Architecture + Planning calls for the 1.3-million-square-foot regional mall to gain expanded retail, new dining options and an upscale grocery.
A significant Pacific Coast example of revitalizing an aging retail property with multifamily is in the works at Alderwood, a 1.3 million-square-foot retail center in Lynnwood, Wash. Brookfield Properties is collaborating with AvalonBay Communities to revitalize the 41-year-old regional mall in the Seattle suburb. Rising on the former site of a Sears store, Avalon Alderwood Place will encompass 328 units and 64,000 square feet of first-floor commercial space.
“Historically, the trouble with mall renovation/repurposing has been long leases and the ends of leases being at different times, so a piecemeal approach has been necessary,” said David Senden, principal at KTGY. But he suggests that if the COVID-19 crisis prompts retailers to leave spaces earlier, lease terminations will provide more opportunities for larger-scale master planning and bigger thinking on redeveloping entire sites.
In contrast to the more common process of transforming office and industrial properties into multifamily, converting mall space itself involves issues that often make it impractical to repurpose the structure as multifamily. The biggest challenges of repurposing a Hallmark, Forever 21 or Brooks Brothers are the dimensions of the store, the plumbing and HVAC infrastructure, and access to natural light. Reimagining a mall as a new property category will likely require demolition in most cases. At most sites, the opportunity for reinvention is in the land rather than the structure.
“It almost always makes more sense to take down the obsolete mall and then add the new multifamily as a ground-up project,” Selden said. “That’s not to say there couldn’t be some very creative solutions that would result in awesome places to live. But, practically, to make the units the right size and shape, to provide the proper infrastructure and to create an attractive parking solution, saving it might be more work than it is ultimately worth,” he added.
The most common trend, Selden said, is to consolidate garage parking and develop multifamily product on the freed-up site. “In some cases, we are demolishing big-box anchors to replace with housing,” he noted.
Evaluating the core product
Every mall presents a unique circumstance, according to Yaromir Steiner, founder & CEO of Steiner + Associates, the Columbus, Ohio-based developer and New Urbanism pioneer. If a mall is in a potentially attractive location for residential development—and the retail is underperforming or defunct—the greatest value is in the site, rather than in the buildings.
“There are projects around the country where the mall could not exist, so essentially the mall was progressively demolished and became a residential neighborhood,” Steiner said. Several hundred multifamily units can be added initially on five or 10 acres, a step which can be carried out in an economically feasible, minimally disruptive manner. The residential component can be added in phases as the mall is progressively vacated and eventually demolished.
Steiner emphasized that the best match of location and project varies greatly by market. For Miami or Fort Lauderdale, it could mean high-rise condominiums; in Kansas, it may be rental units for Millennial residents.
If the core retail product is working well, then retail and multifamily components can be mutually beneficial. Building parking decks is a viable solution, in Steiner’s opinion, so surface parking can be consolidated and the lots themselves can be redeveloped as multifamily. “We have seen value adds or increased rents in the range of 20 percent when the residential can be located in a place where they can take advantage of the amenities such as restaurants, bars and health clubs provided by the regional retail destination,” he said.
In 2006, Steiner renovated Bayshore Town Center, a mall in Glendale, Calif., an upscale Milwaukee suburb. “They were still operating, but kind of on their last legs, so I demolished part of the mall, saved the rest and put in a shopping center and 113 apartment units above retail and a parking garage,” he recalled. All told, the renovation expanded the property by 500,000 square feet. Cypress Equities, the property’s current owner, is proposing to add the property’s next multifamily component, a four-building, 316-unit project.
It remains to be seen to what extent underperforming malls can help solve the affordable housing shortage, which COVID-19 has intensified. Even developers who don’t think shopping centers should be targeted to solve the affordable housing problem expect to see more affordable units blended into apartment properties, whether it happens in a revitalized mall or another prime location.