The Key To Long-Term Viability For Malls
Top line revenue growth is the only way to ensure long-term viability of a property.
Dave Collins

In the May 2009 issue of Shopping Center Business, I wrote an article on the operating reality of lower tier malls. My focus was on cost containment, as reducing costs is the quickest and generally the easiest way to improve bottom line performance. However, cost reductions are finite. Top-line revenue growth is the only way to ensure the long-term viability of a property.

My focus in this article is on enclosed regional malls. However, some of the opportunities identified are applicable to any retail project. In many cases, owners of B and C malls are in a triage situation doing whatever can be done to keep the lights on and the cash flowing.

Generally, B and C malls have significant vacancy. Ideally, the goal is to retain a coherent merchandise mix by pursuing prospects that are similar to the tenants who have left. I have had very good success with second-tier or local/regional operators but there are challenges. First, forget full pass-throughs. In fact, gross rents are the order of the day. In addition, the deal negotiations require more handholding and the financial strength is usually weaker. However these merchants can be flexible in taking second-generation space with minimal build-out and they generally understand their market very well. In a world of me-too sameness, they can also provide a sense of uniqueness. Sourcing these merchants is hard work. It requires a lot of shoe leather and persistence. You need to cold call strip centers, street retail and, yes, other disadvantaged malls. This is not an abstract deal negotiation. In many cases the prospect’s livelihood revolves around the success of this location.

Changing Demographics

One of the more common issues faced by older malls is that the trade area has demographically changed. Many national retailers define their customer in mainstream terms and don’t focus on the ethnic segments of our population. I have been involved in re-leasing malls where up to 40 percent of the small store GLA has been leased to local, ethnic-oriented merchants. Some of them have gone on to open multiple stores. If your mall is in this situation, embrace the change with enthusiasm. Leasing to the current needs of the market creates a vibrant property. These merchants are entrepreneurial to the core but can require nurturing, as a number are new to retailing. Additionally, they are tremendous prospecting resources. Incent them with free rent and watch what happens.

There are national retailers who meet the needs of diverse ethnic groups, but I have found that standard census reporting tools are sometimes ineffective in identifying these groups, particularly if there has been a significant swing in population makeup between census dates. I have successfully worked with various non-profit groups (particularly housing development corporations and university public policy departments) who can drill down into multiple databases to capture a more complete census to present a compelling case to national retailers.

The Service Opportunity

Another category to look at is services. Malls have historically had limited service uses, generally along side corridors. However, in today’s world, put them front and center. One of the most successful service options that I have found is a state license bureau. In one mall, I put in both a driver’s license bureau and a local tax/municipal service bureau. Did these two locations generate traffic! And no rent collection issues!  Place them next to a food court and it’s a win-win.

Social service agencies are another traffic generator, although with higher build out costs. I have negotiated with the YMCA for a limited fitness and program facility and there are hundreds of social service agencies that need relatively inexpensive space. There may be parking and access issues but they generate traffic and rent. Branch libraries are another service option and relocating municipal offices to underutilized portions of the mall can be fruitful. If the food and retail base is still somewhat intact, office workers generally support such a move.

Other Options

I have had success taking very disadvantaged space and leasing to back office/warehouse uses. You may only get $5 per square foot gross plus utilities, but one deal with a regional retailer for 25,000 square feet of warehouse space generated $150,000 a year, plus it later opened a retail location in the mall.

Many enclosed malls built in the 1970s and ‘80s have a smaller non-stadium seating theater. They cost a ton to demo and while they sometimes can be back-filled with discount operators, usually the equipment needs to be upgraded etc. I have found two groups that can effectively utilize these facilities. The first are church organizations. In addition to Sunday morning, many of these churches have outreach and youth programs that run in the evenings. Second are civic organizations. I am constantly surprised how many local organizations need a venue for events, speakers, etc., and will pay rent.

Struggling malls usually have one thing to spare and that is parking. If the property is in an in-fill location, rent out a portion of the parking field. I have rented parking fields to car dealers for storage. It makes money and creates the impression of activity at the property. Some uses may give you pause but in my opinion, virtually any traffic is good traffic. Another revenue source is signage. Many older malls have superior locations on highly visible roads. If you control a vacant department store, you can use this to your advantage and position it as, in essence, a giant billboard.

Longer Term Revenue Solutions

The above are meant to provide short-term revenue options with limited landlord investment.  However, more permanent dealings with a troubled mall require a broader vision and usually a deeper pocketbook. Some non-traditional options include:

The faith-based model

In my recent experience, some of the more aggressive partners in working with retail landlords have been faith-based organizations. Not only do they want large blocks of space for their own use, but also in most cases, your mall is an important part of their community and the congregation wants to see it succeed. (I recently sold a mall to a church group who retained a portion for retail use.)

The medical-service model

Physicians and practice groups have been de-coupling from hospitals for years; particularly rehabilitation, diagnostic imaging and outpatient surgery centers. With large blocks of vacant contiguous space, a mall owner can create a very functional medical wing. The practice groups like it because it gives the staff and patients’ families convenient options while they wait. I know of one mall owner who partnered with a nearby hospital to fill an entire vacant wing with a variety of back office and support services. Of course, the build out costs can be high, but so is the rent.

The boomer model

If you have lost most of your junior apparel stores, use it to your advantage. Boomers don’t care and they are the fastest growing demographic by far. They have plenty of money and are reaching a point where they have more time. But, they are most definitely not traditional mall walkers. Be the first to define a new shopping option for boomers — uses more in sync with their lifestyles, more amenities, more cultural options etc. Has it been done? Not that I am aware of. Remember, 60 is the new 40.

Where Next?

Malls were created in response to a huge population shift to the suburbs and they served this shift very well. However, the role of malls on the margin needs to be rethought. In some cases, these malls are functionally obsolete and will be recycled to other uses. In other cases, repositioning/repurposing can breath new life into these properties. Regardless of the final outcome, every owner needs to maximize cash flow while the larger picture plays out. As you can see from the examples in this article, there is not a one size fits all solution. The first and most critical step for the owner of any troubled mall is broadening the thinking to recognize that continuing to pursue the same retail path is most likely fruitless. The recognition that the mall property is a platform, which can include any number of uses, is the key to success.

Dave Collins is a repositioning/turnaround specialist with 25 years experience in leasing, development and management. He can be reached at dfxcollins@me.com.

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