By Gerry Khermouch
As the backdrop for the 1980s movies Fast Times at Ridgemont High and Valley Girl, the Sherman Oaks Galleria served as the archetypal enclosed mall in that Southern California über-suburb, the San Fernando Valley. By the 1990s, though, it wasn't just film characters Stacy Hamilton and Julie Richman who had moved on to fresher pursuits. So had tens of thousands of real Galleria habitués. The Northridge earthquake of 1994 accelerated the mall's downward spiral, after which local developer Emmett Douglas decided in the late 1990s that it was time to raze the roof.
The $100 million undertaking, unveiled in late 2001, literally blew apart a fortress mall surrounded by a moat of blacktop parking, replacing it with the town center missing in the Valley's sprawl for all these decades. A rich mix of inviting piazzas and esplanades provide the setting for street-level stores, al fresco restaurants, and outdoor performance stages. These amenities are calculated to appeal to affluent knowledge workers like those at Warner Bros. Animation Studios, an outfit that has moved into space carved out from a former Robinson-Mays department store.
In essence, the redevelopment shrank the Galleria's 1.25 million square feet of retail and entertainment space by more than a third, replacing it with 700,000 feet of commercial space, already 85% leased. "We turned that mall inside out," says Andy Cohen, managing principal of the Los Angeles office of Gensler, the architecture firm that handled the project. Although it has been open barely a year, mall experts believe it's panning out so far, although the developer has not revealed financial details.
Dozens of such transformations are occurring all over the country, from Southern California to Denver to Columbus, Ohio, as developers try creative ways of rescuing malls driven under by population shifts, retail overbuilding, and the demise of the department stores that are the shopping centers' typical anchor tenant. It amounts to a big bet -- and a risky one -- on the notion that shoppers have undergone a shift in the retail experiences they seek.
Now, rather than devoting a day to mundane shopping chores, people seem to prefer bundling those trips with entertainment, dining, strolling, and other activities, in town-like settings that evoke nostalgia for the thriving downtowns that were put out of business by suburban malls. "Consumers are burned out on the sterile mall experience and are looking for more adventure," says retail consultant Chris Boring, president of Boulevard Strategies, in Columbus, Ohio.
RACE FOR SPACE.
So far, retailers seem eager to get involved. Even as some cut back on expansion plans in a weak economic climate, they're flocking to these "Main Street" redevelopments. They like the opportunity an on-street location provides to create a more distinctive store exterior than in an enclosed mall. And if a mall becomes a genuine town center, they figure it will drive more frequent visits that result in serendipitous purchases. "The entire center becomes a destination, and your store becomes part of that," says Len Riggio, chairman of Barnes & Noble, which seeks out such locations for new bookstores.
Among the biggest enthusiasts of the new-look malls is Limited Brands CEO Leslie Wexner, who has developed one such site, Easton Town Center, near the company's Columbus (Ohio) headquarters. "There has to be emotional content to the shopping experience," he told shareholders at the annual meeting in October. "Easton proves that there's another turn to the retail wheel."
With two-thirds of the nation's biggest malls more than 20 years old and hundreds estimated to be struggling, mall reinventions have plenty of proving grounds. That's particularly true at a time when new-mall construction is moribund, with fewer than half a dozen regional malls being built. The Congress for the New Urbanism (CNU), a proponent of higher-density, transit-oriented "smart growth," last year identified 140 failed or failing regional malls as candidates for redevelopment into town centers that include retail, office, and residential space. Resuscitation efforts are already planned or under way for several of them.
Still, for all the potential upside, these projects' complexity makes them far riskier than simply shifting a failing mall to a lower order of retail use -- say, an outlet center -- or to nonretail uses such as back offices, government bureaus, or community colleges. Local governments must usually provide some financial support to fund, say, infrastructure needs like parking facilities. Sometimes they must also employ their powers of eminent domain to wrest control of the site from department stores, which may retain veto power over new uses even after they have shut their own doors.
While mall developers and retailers have taken heart from the apparent successes of Florida's Mizner Park, which opened in 1998 on the site of the demolished Boca Raton Mall, and the Sherman Oaks Galleria, a few high-profile projects have already run into trouble. In San Jose, the Silicon Valley technology bust vaporized commercial and residential demand just as an ambitious redo of the failed Town & Country Mall was opening under the name Santana Row.
That, along with a major fire in August, prompted developer Federal Realty Investment Trust in Rockville, Md., to abandon plans for future Main Street redevelopments in order to return to its roots in grocery-anchored shopping centers. For a real estate investment trust like Federal, the time frame to ride out these cycles before obtaining a financial return is simply too short, a spokeswoman says.
PATIENCE IS A VIRTUE.
Despite the Santana Row fiasco, however, money is continuing to flow into mall-resuscitation projects. Some is coming from local governments eager to jump-start redevelopment efforts. A few administrations are even purchasing failed malls outright, as the city of Upper Arlington, Ohio, is negotiating to do with a 14-acre swath of the foundering Kingsdale Shopping Center, for $12.65 million. The city aims to promote mixed-use development that includes a community recreation center, new stores, and "just enough residential to make it 24/7," says Patty Dalton, the city's economic development director.
Private developers more patient with their capital than REITs also say they're committed to the idea of turning foundering malls inside out. "These very, very complicated deals work for us because we're interested in long-term ownership," says Will Fleissig, co-founder and partner of Denver developers Continuum Partners, which is transforming the failing Villa Italia mall in Denver's Lakewood suburb into a town center called Belmar.
Belmar will offer 1 million square feet each of retail and office space, along with 1,300 residences. Skeptics of the nascent trend point to several barriers. They argue, for example, that the economics work best in affluent areas, particularly in Sun Belt cities where populations are still growing.
So far, that has usually been the case, but some exceptions exist. In working-class Long Beach, Calif., a downtown fortress mall has been demolished, the street grid restored, and a 12-acre "super block" established under the name City Place, with 258 rental units and resolutely middle-of-the-road anchor stores: discounter Wal-Mart, grocer Albertson's, drugstore Walgreen, and clothing discounter Ross Stores.
Another question mark is whether the most ambitious redevelopments, with residential as well as retail and commercial components, will prove viable. True, having residents on-site creates an extra layer of retail demand and contributes to activity at times that the malls might otherwise be deserted. But residents compete for parking space, complain about noise and congestion, and create needs for service businesses that may be incompatible with the mall.
Developers who overestimate the benefit to retailers of on-site residents and workers can be in for a shock. "It can be a house of cards," warns Boring, the retail consultant. "The retailers had still better be getting most of their demand from off-site and have parking for that."
Will the trend be sustained? With city governments increasingly willing to use their own resources -- from their powers of eminent domain to revenue bonds and tax-increment financing -- to tilt development toward uses that will create vibrant, pedestrian-oriented districts, odds are good that it will. "If you're really, really lucky, you'll be in a market where the city wants to do something and is willing to help you," says Randy Brant of Macerich Co., which is cutting a street through an enclosed mall in Santa Monica, Calif., under the name Santa Monica Place. Then again, maybe they're not all that lucky.
Some form of public support was involved in all but two of a dozen remalling projects that were analyzed in detail by the CNU. Of course, the fiscal threats confronting many municipalities could tighten the spigot on such assistance, but the prospect of an enhanced tax-revenue stream shouldn't shut it off altogether.
And if Fleissig, Brant, and enough of their peers stay the course, it could help clear the landscape of underutilized mall carcasses, while improving the shopping experience for millions of Americans and offering them a new version of the old downtown.
Khermouch writes for BusinessWeek in New York
Edited by Beth Belton