As malls and shopping centers look towards recovery from the havoc wrecked by COVID-19, many are being forced to redefine themselves in order to adapt to the accelerated changes in the retail industry. Though regional malls as a sector were already in decline prior to 2020, the pandemic has accelerated this trend, pushing many mall owners to embrace mixed-use development and, in some cases, reposition their properties into other uses altogether.
At this moment of transition, real estate services firm CBRE has launched a new mall repositioning team that is using big data to help mall owners explore repositioning and mixed uses in order to find the best option for maximizing the returns from their properties. The team is led by Mark Hunter, CBRE managing director of retail asset services, and Todd Caruso, CBRE senior managing director of retail investor services.
“What drove us in creating this practice is helping clients figure out the highest use and best use strategies for that retail space that really no longer has a retail purpose, whether that be residential, office, logistic, last mile, hybrid stores, hospitality, education [or] medical,” says Hunter. “We can not only take the data and develop the strategies, but then help them implement it and secure the right tenants, developers, partners, and help execute on it.”
In Hunter’s opinion, the vast majority of large-format retail centers will not only survive the current shifts in the sector, but are already seeing large tenant sales increases, significantly beating pre-pandemic revenue figures from 2019. As he puts it, “This is the roaring 20s in the U.S.”
WMRE asked Hunter to discuss the shifts in the regional mall sector and how CBRE is using new data tools and analytics to help mall owners adapt to a new era.
This Q&A has been edited for style, length and clarity.
WMRE: How much permanent damage has the pandemic inflicted on the regional mall sector, in your opinion?
Mark Hunter: I think there's a lot of noise, quite honestly. If you take a step back pre-pandemic, and you look specifically at shopping centers in the U.S., whether it be enclosed malls, lifestyle centers, power centers—anything that has multi-tenant buildings—we have 26 square feet per capita in the United States. Then you add high street and single-tenant buildings that have Target, Walmart, Home Depot, Lowe’s, whatever it may be, that's another roughly 20-25 square feet, so you're up over 50 square feet. As a comparison, in Canada, if you just look at the shopping centers in the multi-tenant sector, they have 16 square feet. Compared to Canada, we have 50 percent more square feet per capita, just as a comparison point.
There was already a rightsizing of square footage in the U.S. prior to the pandemic, no matter what the retail format was. I think the pandemic initially accelerated that, but I've been traveling with clients going to various shopping centers in different cities, and this is the roaring 20s in the United States. Sales increases are through the roof as we come out of the pandemic. I think that some of the doom and gloom that you've heard, specifically on the mall sector, is over-exaggerated.
To have a significant sales increase [from] 2020, when we're all dealing with the pandemic, that's one thing, but 2019 was a good economic year for the U.S., one of the better ones. A lot of the sales increases that we're seeing specifically in apparel, food and beverage, shoes—those increases are significantly beating 2019. And I think that's being under-reported.
The retail sales that are being achieved in 2021 over 2020, they’re blowing the doors off. But that should be expected. What is a surprise to me is how well we're doing against 2019, and that's going to help those centers that maybe were a bit more challenged. That's going to help lift them up and give them some additional momentum to get through this.
I think it's also going to free up the capital markets a little bit. My specialty is not capital markets, but the capital markets during the pandemic were basically frozen for retail. You could get financing for A properties. There was hardly any for B and none for C malls. Today, that capital is starting to unfreeze, especially for B centers. You’re going to see a lot of lenders become more willing to provide favorable economic terms for both parties and I think that's going to help developers and redevelopers.
WMRE: Has this sales growth been true across the board, or are there particular parts of the sector that have been hurt the hardest?
Mark Hunter: I think it's been somewhat accelerated, especially in the C malls. When you get under $300 per square foot, that's where some of the challenges are and that's where you see some of the department store fallout. It's hard to categorize, but in general, the A malls are doing just fine. Most of the B malls, I think they’ll get through this. Where the real challenge is in the C mall category.
But I think that now, along with some of the sales increases that we're seeing in our portfolio and throughout the retail sector, the National Retail Federation just re-estimated their increase for retail sales for this year and I think it’s approaching [over 10 percent]. For some of the categories, you would say “I don't know if that makes sense,” but apparel and food and beverage are some of the healthier categories. Part of it is that people are getting out and about and they're looking at their clothing, what they’re wearing on a Zoom call, and saying they’re sort of sick and tired of seeing the same t-shirt.
WMRE: Do you expect there will still be pure-play regional malls after COVID-19 that will be able to thrive? What will it take for mall owners to achieve that?
Mark Hunter: Some of it is basic: location, location, location. That's not going to change in real estate, never will. But a very well-capitalized owner, a well-merchandised center. Even some of the A malls have had some department store fallout and those well-capitalized, strategic owners are adding non-retail uses. That's one of the reasons why we started this practice, which specializes in helping mall owners and large-format owners—of lifestyle centers, outlet centers and such.
Even though there's a great future for most bricks-and-mortar retailers, so long as they change with the times, there's just too much retail in this country. What drove us in creating this practice is helping clients figure out the highest use and best use strategies for that retail space that really no longer has a retail purpose, whether that be residential, office, logistics, last mile, hybrid stores, hospitality, education, medical.
And we now have the data to help them. Before, you had all this big data, mass mobile data, you had research, but it was focus groups or was driven by certain economic and other metrics. But you really didn't have current data to prove whether you're on the right path or not.
Now we do, and in many cases it’s predictive and it helps those clients—it's a gut check. Good developers that have been in the business for a long time, they can sense an opportunity. But if you have to go get financing today and you just say “It's a great location and I’ve got this tenant and they're going to pay us this rent”—today you need more than that. You really need data, and that helps with the financing.
When you have that data, it also helps get partners lined up and it helps develop strategies. One size does not fit all, every situation is different, every market is different, every location is different, every merchandise mix is different, every client is different. They have different needs, different objectives, and so we can take that data and show them the right roadmap and then provide those strategies that best fit their needs and objectives. We can not only take the data and develop the strategies, but then help them implement it and secure the right tenants, developers, partners, and help execute on it.
WMRE: We have all heard estimates of how many U.S. regional malls the industry expects to close over the coming years. As you have launched the mall repositioning group, what is your current estimate about how many closings we should expect to see and over what time period? How many of those could be repositioned and what are the indicators you look to?
Mark Hunter: It would be purely a guess on my part, but what I can tell you is that the vast majority of malls and large-format properties will survive. Even the best of the best are reinventing themselves and repurposing. I can give examples, whether it be Century City in L.A., University Town Center in San Diego, Oak Brook Center in Chicago. They are adding office, hospitality, co-working, and those are the best of the best. These centers are doing $800-$1000 per square foot or more and they're adding non-retail uses.
But you know, what we think is new is old. I've been in this business for 40 years. I can point out many examples of mixed-use centers that have been around. In Spain, in Europe, they've had retail on the first level, residential or office on the second level, literally for hundreds, if not thousands, of years.
In the U.S., one of the best examples is Country Club Plaza in Kansas City. Opening in the 1920s, they had drive-up parking—that was sort of their claim to fame—they had retail on the lower level, they had hotels, office, entertainment, they had a theater. Highland Park Village in Dallas has a very similar type of footprint and tenant mix. So, we're sort of going back to the business model that's been around for hundreds of years. We're just putting it in a different format and it's in an existing footprint, which makes it more complicated. So, the best of the best are going to do that.
Then you have the extremes, where you have C malls that really can't reinvent themselves into a mixed-use environment, so they've been scrapped and turned into a logistic industrial complex. We have a list that may be approaching 75 large retail format properties that have basically been converted into an industrial property. Because the one common denominator on an A, B or C mall in almost every single case is that the dirt or the real estate is still Main and Main in most cities in this country. It's still a great location. It's just that, for a variety of reasons—that a department store or two have left, that triggered co-tenancy, the small tenants started to leave—but there's still a core of good retailers that have survived. It’s just that it's got to change, to reinvent itself or it’s not going to survive.
I think the majority of malls survive, but I think the ones that are going to be under the most pressure, that may end up completely reinventing themselves, whether it be demolished and it becomes industrial or it becomes a combination of multifamily, hotel, maybe a single-tenant building that has a retailer in it, the pressure is going to be on C malls. I don't think it really necessarily matters the location, whether it's in a major market or a smaller market. It's those malls that in general are doing under $300 per square foot, they're the ones that are going to be more challenged to reinvent themselves in a more significant way.
WMRE: What property types are the most logical redevelopment options for failing malls? Why? Can you give us some examples of those types of redevelopment projects and what they involve?
Mark Hunter: Residential is probably the most common mixed use you're seeing in malls. Close behind that is office, specifically co-working, and that could be a very big trend because as people get back to working, you're going to see some folks say “I want to be there five days a week.” Some folks are going to say: “You know what, I'd rather just stay at home” and some employers may say that's fine. But I think you're going to see a lot of people say “I want to have it both ways”—to be able to go into work for a couple days just to go and collaborate, get out of the house and work with people, but not necessarily drive or take public transportation five days a week.
You're going to see that become a very complimentary use in a lot of malls because the typical co-working operation takes between 30,000 and 40,000 square feet. You have 200-250 people per day that come to the facility. They need to eat, they need to shop and you have all the amenities of a mall there, which in a typical office building, the landlord would have to invest in, whereas instead the mall landlords make that investment.
For industrial logistics, we're just getting started on that and you see a number of retailers doing hybrid stores where they're doing, say, half showroom, half logistics, for that last mile. For those great locations that I mentioned earlier, Main and Main that are near a highway, because of our strong industrial presence, globally, we have a lot of data to help our clients make smart decisions on logistics. And they can do it in 20,000 square feet. You don't need a million square feet to do logistics anymore, especially last mile. You need 20,000 square feet and malls are an ideal location for that.
Then hotels—hotels have been around a long time in malls, or adjacent to a mall. And then medical—urgent care, MRI, hospitals—they're going into malls. They want to get closer to their consumer or customer.
WMRE: It looks like CBRE will be using its new proprietary intelligence tech to assess properties and determine the best course of action for each mall. Can you tell us how this new intelligence tech works?
Mark Hunter: This first started out with helping our landlords figure out what the right retail mix was for their shopping centers. CBRE uses mass mobile data, demographic, psychographic, consumer behavior data and a significant amount of proprietary research metrics to determine supply and demand to then provide the highest and best use strategies for clients. It will tell us, in a particular trade area down to the census tract, what the preferences are for those people that live in that census tract, by household: how much they make, where they shop, how long they shop, what they like to buy. It provides that information in a footprint for targeted retailers to go after, to secure in a shopping center.
Now it's different data points and different metrics, but the underlying foundation is that mass mobile data for a lot of those mixed uses. We can tell you by census tract how many people buy e-commerce goods. We can go to an e-commerce retailer or bricks-and-mortar retailer and say “In this trade area, this is how much they're ordering on e-commerce and if you want to be able to service those clients within a 30- or 60-mile drive time, this is the location you’ve got to be in.
There are different metrics, but we do the same thing for office, for hotel, for residential and medical. It's different data points and we get it from different sources, but a lot of it is proprietary. A lot of that research is our own information that we've gathered over years and years.
WMRE: Can you give us an example of where you used these tools, the recommendation you came up with and which indicators it was based on? What was the end result for the property?
Mark Hunter: I’ll give you one concrete example in the Midwest. We had a mall client that came to us with several locations and we ranked these locations for last-mile distribution facilities based on our proprietary research. He selected from the menu of locations and he picked this Midwest location with a vacant big box of approximately 60,000 square feet. We put together the strategy, the tenants and the right industrial team and they're out there right now in the process of securing an industrial and logistics tenant to take that box.
WMRE: Are there certain types of mall owners who are more likely to hire someone like CBRE’s repositioning team than others? For example, is this something that would be viable for smaller operators without the capital available to the large mall REITs?
Mark Hunter: I don't even know if we're in the first inning of what you're going to see over the next 10 to 20 years as we redevelop these properties, but we are engaged or in conversation with over 20 clients on various properties around the country, on how to reinvent or repurpose, and it's not only on the landlord side. It's also on the occupier side. You have large retailers that may have too much space and it’s underutilized and they are also trying to find the highest and best uses and to maximize it.
Whether it be a million-square-foot mall or a 100,00- or 200,000-square-foot box, we're working with those retailers as well to help them to reinvent themselves. And it's global. We're working with retailers and landlords outside of the U.S. right now. I can also tell you it's a range of small private owners to institutional owners. It runs the gamut from some of the world's largest real estate investors to some of the smallest.