Posted on

Malls Seek to Evolve as the Pandemic Hastens a Retail Overhaul

In southwest San Francisco near San Francisco State University and championship golf courses, Brookfield Properties is redeveloping its Stonestown Galleria in perhaps the most disruptive retail environment in modern times.

Macy’s vacated the mall in 2018, and Nordstrom followed about 18 months later. Consequently, Brookfield, a global real estate developer and manager, is spending $149 million to reconfigure the 804,000-square-foot property, adding a Whole Foods, a health care provider and a Sports Basement sporting goods store, while expanding an existing Target and relocating a stand-alone Regal Cinemas to inside the mall.

Plans to build apartments are also in the works at the property, which after reopening in June was ordered to close again as coronavirus cases surged in California.

More than just a routine overhaul, the improvements represent an effort to stay relevant as growth in online shopping combined with shifts in retailing practices and consumer tastes have for years dismantled the traditional shopping mall model.

Image

Credit…Jason Henry for The New York Times
Image

Credit…Jason Henry for The New York Times

“If the old mall design was one of two to four department stores with connecting retail space, in my mind what we’re doing at Stonestown Galleria is closest to the modern footprint going forward,” said Adam Tritt, executive vice president of development for Brookfield. “We don’t necessarily see the pandemic or shifting role of department stores as new. Retail is always changing.”

Indeed, Brookfield, Simon Property Group, Unibail-Rodamco-Westfield and other mall operators have spent billions positioning themselves for a future with few or no department stores after the struggles of traditional anchors like Sears and Macy’s. Under pressure caused by pandemic-induced lockdowns, J.C. Penney and Neiman Marcus are the latest distressed mall anchors to declare bankruptcy and close stores. Malls were also hit by the loss of other retailers that have fallen during the pandemic, like Brooks Brothers and Ascena Retail Group, the owner of Ann Taylor and Lane Bryant.

Developers have replaced the vacant big boxes with a mix of retail, dining, entertainment, fitness, co-working and health care options. They have also added apartments, hotels and offices to the properties — often to make better use of vacant parking lots and create built-in traffic generators — and they are beginning to create distribution and self-storage hubs at malls as more people purchase their goods online.

Image
Credit…Jason Henry for The New York Times

In June, Washington Prime Group agreed to turn a former Sears location at its Morgantown Mall into a logistics, distribution and fulfillment center for WVU Medicine, the health care network serving West Virginia University. The move comes after Washington Prime’s recently announced Fulventory initiative, through which the company is providing logistics and warehouse solutions at its properties.

“As more department stores become vacant, we do need to re-envision the future of mall properties,” said Greg Maloney, president and chief executive of the Americas retail unit of Jones Lang LaSalle. “Will it be 100 percent retail? No, but its success still comes down to location.”

Long before the coronavirus arrived in the United States, many malls, often overburdened with debt and struggling with vacancy and declining values, were fighting to stay alive.

The number of malls has declined to less than 1,000 today from 3,000 at the turn of the century, according to Nick Egelanian, president of SiteWorks, a shopping center and retail consultant in Annapolis, Md. And, he predicts, only about 200 of the strongest malls with the best locations will be left by the end of the decade, if not sooner.

But to thrive, most must adapt, said Mr. Egelanian, who has long argued that the deconstruction of department stores — and therefore malls — began 40 years ago with the dawn of big-box stores, or “category killers.”

“The true mall of the future will incorporate a mix of uses,” he said, “and the retail will be downsized: If it has 2 million square feet today, it may only need 1 million square feet tomorrow. But it’s going to be painful getting there, and the ones that survive are going to need a lot of capital.”

The ideal, he said, will mirror properties like Tysons Corner Center, a 1.9-million-square-foot mall in Virginia owned by Macerich that is surrounded by offices, high-rise residences and hotels.

Some malls will emphasize luxury and cater to the affluent, observers add, while others will focus on middle-market consumers and continue to replace former anchors with off-price tenants, such as Dick’s Sporting Goods, Burlington and T.J. Maxx, which have traditionally operated in strip centers or lower-tier malls.

The off-price strategy is one that malls of higher quality previously avoided, said Vince Tibone, a senior analyst covering retail for Green Street Advisors.

“In the minds of the owners of top malls, there was a higher and better use for their properties,” he said. “But there are a lot fewer options to backfill space today, and even those malls are looking to just get tenants into vacancies.”

To better position itself for the future, one middle-market mall owner, Pennsylvania Real Estate Investment Trust, has sold 18 malls with significant department store exposure over the past five years and is reinvesting more than $885 million in proceeds into its core assets.

Image

Credit…PREIT
Image

Credit…Patrick Darby Photography / Tonic Photo Studios

Among other projects, the real estate trust sank $210 million into the Fashion District, a 1.5 million-square-foot mall in downtown Philadelphia that it owns with Macerich. A number of new tenants joined the roster when it reopened in 2019, including an AMC Theaters cineplex and the flexible-office provider Industrious.

Other nonretail companies continue to show interest in the company’s properties, said Joseph F. Coradino, chief executive of Pennsylvania Real Estate Investment Trust, which is based in Philadelphia and owns 21 malls primarily on the East Coast.

“When you step back and look at malls, they typically have phenomenal locations at major intersections and highways,” Mr. Coradino said. “Certainly the mall business today is different than it was a year ago, or even six months ago. But I don’t think the success of malls is a question of apocalypse or death. I think it’s really an evolution.”

Yet like many malls that have been repositioned in the past decade, Fashion District boasts a high percentage of food and entertainment tenants. Plagued by questions over how soon consumers will feel safe returning to them, these businesses are operating at partial capacity nationwide, and some are closing.

“The pandemic certainly gives us a cautionary tale on the value of tenant diversification and how we can best utilize our real estate footprint,” Mr. Tritt said.

Image

Credit…Matterport

Observers anticipate that entertainment and restaurants will continue to generate traffic over the long term, although they acknowledge that full recovery depends on a coronavirus vaccine.

Still, restaurants and entertainment have become so ubiquitous that they have failed to live up to the expectations of many mall owners, said Scott Y. Stuart, chief executive of the Turnaround Management Association, an organization in Chicago that represents restructuring professionals.

“While the uses have filled gaps in malls, they’re beginning to look like short-term solutions,” he said. “Consumers have a choice to go to a mall or some other setting to experience them.”

Some owners, however, will be forced to recognize that their locations no longer fit in the retail world, Mr. Egelanian said. But that may produce opportunities to start new industrial, housing, office or mixed-use developments from scratch.

“There may not be any time in the last 100 years when so many 100-acre sites located at that perfect intersection have been available for redevelopment within such a short period of time,” he suggested. “They will have value for many uses and could be big economic generators for their communities.”

Posted on

Pandemic Threatens to Upend a Thriving Real Estate Model

“Is water wet?” Will Gilson is blunt when asked whether it’s particularly challenging to open three restaurants in the middle of a pandemic.

But the restaurateur is also optimistic because they are slated to open this fall in Cambridge Crossing, a 4.5 million-square-foot mixed-use development near Boston. He sees the complex’s density and location as boons for his business, come what may.

Mixed-use projects have been a hallmark of the country’s urban renaissance over the past couple of decades. They are often thriving complexes built with an ecosystem of residences, offices, plazas, hotels, shops and restaurants. Developers like them for the scope, and business owners like them for the round-the-clock density of people.

In some cases, these projects have transformed whole areas: The 28-acre Hudson Yards over an old train yard brought new life to an underused corner of Manhattan, and the 56-acre Water Street Tampa in Florida will connect the city’s downtown with its waterfront. In general, they have helped define the live-work-play ethos that many younger professionals seek in cities.

Image
Credit…Karsten Moran for The New York Times

But the coronavirus threatens to upend the allure of retail and restaurants in these developments. Safety concerns and a changing patchwork of state and local virus-related regulations have led developers to rethink the layouts and designs of such areas. Ideas coming to the fore could be around for years, or they could start to fade away at the first sign of a coronavirus vaccine.

Starting a mixed-use project can be challenging without all the pieces in place, and the uncertainty over how to proceed has tied developers’ hands. They cannot pitch the office or residential space until they line up the retail and restaurants. And because some businesses are having difficulty paying rent in the pandemic, developers are being forced to look at other ways to collect payment, including a model that bases rent solely on sales, insulating the tenant more from downturns.

But developers agree that safety measures are necessary if projects are to retain the shops and restaurants on the lower levels that help draw people to the offices, hotels and residences up top.

The return to normal will not come simply by limiting crowd sizes, which will not be possible for shops and restaurants that are already surviving on a slim profit, said Les Hiscoe, chief executive of Shawmut Design and Construction, a Boston firm that works with retailers and restaurateurs.

To address that challenge, developers and designers are mulling interior and exterior changes that could drastically repurpose space, an overhaul that will require both customers and merchants to readjust their experiences and expectations. For example, a lot of space once used for sales or dining will now be taken over by behind-the-scenes work as vendors continue to shift to more takeout and pickup service.

“What we’ve seen in the past with our clients is they really want to maximize the front of the house,” said Lauren Chipman, chief executive of Chipman Design Architecture in Des Plaines, Ill. “That is really going to have to change. I think what we’re going to see is some of the front-of-house recaptured for operations.”

Some restaurants in mixed-use developments might embrace the ghost kitchen concept and switch fully to takeout and delivery.

Less drastically, operating safely might focus on controlling the flow of the customers who do go inside. Architects and contractors say they have received requests from clients for graphics and other signage to guide people through stores and restaurants so they do not bunch up or run into one another.

There is also growing demand for motion-enabled technology in a range of areas, including toilets and sinks in restrooms, doors, checkout counters, clothing racks and elevators.

Many mixed-use projects already have the infrastructure in place for such a shift away from touch, said Webber Hudson, an executive vice president at the Related Companies, the lead developer on Hudson Yards. Air filtration systems originally intended for heating, cooling and odor control can be used to fight pathogens.

Image

Credit…Mark Wickens for The New York Times

Hand sanitizer will be omnipresent, merchandise will be spaced farther apart, and material that is deemed as possible short-term hosts for the coronavirus, such as marketing placards and bric-a-brac sometimes found at checkout, will be gone.

But Mr. Hiscoe warned that the demand for these technologies and materials could lead to a supply shortage. “It’s going to come down to a competition of who is the cleanest and who gives the consumer the most confidence to shop there based on the best mitigation strategies,” he said.

Then there are the changes that will be “invented on the fly,” including ones related to modular construction, pop-up stores, ghost kitchens and different ways of recirculating air, said Duncan Paterson, a Los Angeles-based principal at the architecture firm Gensler.

  • Frequently Asked Questions and Advice

    Updated June 5, 2020

    • Does asymptomatic transmission of Covid-19 happen?

      So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement.

    • How does blood type influence coronavirus?

      A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study.

    • How many people have lost their jobs due to coronavirus in the U.S.?

      The unemployment rate fell to 13.3 percent in May, the Labor Department said on June 5, an unexpected improvement in the nation’s job market as hiring rebounded faster than economists expected. Economists had forecast the unemployment rate to increase to as much as 20 percent, after it hit 14.7 percent in April, which was the highest since the government began keeping official statistics after World War II. But the unemployment rate dipped instead, with employers adding 2.5 million jobs, after more than 20 million jobs were lost in April.

    • Will protests set off a second viral wave of coronavirus?

      Mass protests against police brutality that have brought thousands of people onto the streets in cities across America are raising the specter of new coronavirus outbreaks, prompting political leaders, physicians and public health experts to warn that the crowds could cause a surge in cases. While many political leaders affirmed the right of protesters to express themselves, they urged the demonstrators to wear face masks and maintain social distancing, both to protect themselves and to prevent further community spread of the virus. Some infectious disease experts were reassured by the fact that the protests were held outdoors, saying the open air settings could mitigate the risk of transmission.

    • How do we start exercising again without hurting ourselves after months of lockdown?

      Exercise researchers and physicians have some blunt advice for those of us aiming to return to regular exercise now: Start slowly and then rev up your workouts, also slowly. American adults tended to be about 12 percent less active after the stay-at-home mandates began in March than they were in January. But there are steps you can take to ease your way back into regular exercise safely. First, “start at no more than 50 percent of the exercise you were doing before Covid,” says Dr. Monica Rho, the chief of musculoskeletal medicine at the Shirley Ryan AbilityLab in Chicago. Thread in some preparatory squats, too, she advises. “When you haven’t been exercising, you lose muscle mass.” Expect some muscle twinges after these preliminary, post-lockdown sessions, especially a day or two later. But sudden or increasing pain during exercise is a clarion call to stop and return home.

    • My state is reopening. Is it safe to go out?

      States are reopening bit by bit. This means that more public spaces are available for use and more and more businesses are being allowed to open again. The federal government is largely leaving the decision up to states, and some state leaders are leaving the decision up to local authorities. Even if you aren’t being told to stay at home, it’s still a good idea to limit trips outside and your interaction with other people.

    • What’s the risk of catching coronavirus from a surface?

      Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks.

    • What are the symptoms of coronavirus?

      Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days.

    • How can I protect myself while flying?

      If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.)

    • Should I wear a mask?

      The C.D.C. has recommended that all Americans wear cloth masks if they go out in public. This is a shift in federal guidance reflecting new concerns that the coronavirus is being spread by infected people who have no symptoms. Until now, the C.D.C., like the W.H.O., has advised that ordinary people don’t need to wear masks unless they are sick and coughing. Part of the reason was to preserve medical-grade masks for health care workers who desperately need them at a time when they are in continuously short supply. Masks don’t replace hand washing and social distancing.

    • What should I do if I feel sick?

      If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others.