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The ART of Demalling

In its 1960s heyday, Villa Italia, a 1.5 million-square-foot enclosed mall in Lakewood, Colo., was a luminary among regional centers. But by 2001 it stood empty, like the fossilized shell of a long-extinct animal, as 80,000 cars drove past daily. Now all traces of the dinosaur are gone and in its place Villa Italia is being reincarnated as a mixed-use development by Denver-based Continuum Partners LLC. In its new life, as Belmar, the complex will include 1 million square feet each of retail and office space, 2,400 apartments and four acres of parks and open space. In place of the inward-looking corridors of the old enclosed mall, stores face the streets. Developers are becoming town planners.

As in any mall makeover, the goal of demalling is increased profitability, at least once the big infrastructure investments have been made and the makeover is complete. At its peak in 1993, Villa Italia's anchor stores generated about $200 per square foot in gross sales, at best. In the meantime, Taubman Centers' 1 million-square-foot Cherry Creek, opened in 1990 and anchored by Neiman-Marcus, Lord & Taylor and Saks, was scoring sales per square foot in the $400 range only eight miles away.

Villa Italia's solution to a dying mall is being repeated across the United States as sick malls deteriorate into “greyfields” — tired retail spaces that have lost their allure and financial productivity. The solution for many mall owners is demalling — going beyond the cosmetic facelift, or remalling, that even successful malls sometimes undergo.

In cases like Villa Maria, so much traffic has been lost to nearby fortress malls (from which it is almost impossible to win back business), the only alternative is to change the property's function from purely retail. (For more on demalling — from the hypotheticial to the fanciful — see story on page 108.)

Nobody knows precisely how many greyfield shopping centers are ripe for redevelopment. The last available estimate was in 2001, when the Congress for the New Urbanism, an advocacy group, released a study it had done with PricewaterhouseCoopers. At the time, according to the study, 140 regional malls were already greyfields with another 200 to 250 malls headed in that direction. Those numbers have not been updated, says New Urbanism's communications director Steven Bodzin. But as of last summer, 14 greyfields around the United States had been demalled, he says.

Why should once-popular powerhouse malls such as Villa Italia — located in the bustling Denver suburbs — suffer from the real estate equivalent of hardening of the arteries? Analysts cite a variety of reasons: the shifting psychology and demographics of consumers, the recent doldrums of the economy, and a tendency to overdevelop retail in major markets. “There are 20 square feet of retail space per person in the U.S. today, compared to 14 in the 1990s,” an increase of 43 percent, says Michael Beyard, a senior resident fellow at the Urban Land Institute in Washington. “Is that sustainable? No.”

Also, there is such a thing as old age. “Malls aren't built to last,” says Bodzin. “They're built according to the aesthetics of the times and locations. All of those things change.”

Barbara Caplan, a partner at market researcher Yankelovich Inc., based in Chapel Hill, N.C., thinks that the very concept of the mall may be outmoded. Caplan believes mall shopping — racing from one store to the next dragging around packages — is a source of stress for consumers, when that's the last thing today's hard-working shopper wants. “Stress levels are so high,” she says. “People for the most part say that they want ‘anything that will de-stress me, will give me pleasure and relaxation.’”

Her company's Yankelovich Monitor, which tracks social trends, reports that 76 percent of respondents 16 and older agree with the statement, “I need to find ways of reducing stress in my life.”

For developers, that may mean building more open-air shopping projects, where green spaces and relaxing diversions relieve stress. It means convenience — parking near stores and convenient transportation. It can also mean a mixed- use development, providing office workers and residents with shopping in their own backyard.

At least that's what Continuum is betting on as it plows $225 million into scraping away the old Villa Italia and erecting the first phase of Belmar. Later phases, estimates Tom Gougeon, principle with Continuum Partners LLC, the Denver-based developer of Belmar, will cost approximately $500 million.

The jury is still out on the long-term success of mixed-use development, but New Urbanism's Bodzin says consumers (at least in traffic-congested Denver and its suburbs) are looking for an alternative to the typical suburban lifestyle, which requires long, separate trips by car to work, recreation and shopping. “People really do want to live above the store now,” he says. “They are looking for communities. They want to be around other people.”

And they really want to get out of traffic. With a project like Belmar, says Bodzin, “for some aspects of family and office life, you can walk to some of your errands.” Further, when demalled properties have access to public transit such as buses or light rail, “it can be pretty desirable.” Belmar, for example, is served by eight regional bus lines, while discussions are under way with the Regional Transportation District, the city of Lakewood and local property owners to bring light rail service to “within a mile or a mile and a half of that site,” says Gougeon.

What's more, he says, a mix of uses at places like Belmar helps flatten out the bumps in the real estate cycle, at least over the long run. “If one market segment is slow,” he adds, “at least there are no prolonged periods with nothing to do.”

“Nobody is saying these things are bulletproof,” he cautions, “but even in a weak economy there are still some segments in the mix that are doing well.” He points as “a small example” to a demand for medical offices to serve the needs of the new community. Belmar's town homes “are a hot commodity,” he adds.

McStain, a regional builder constructing town homes on the Belmar site has an inquiry list of several hundred people, he says.

But demalling isn't always smooth sailing. Federal Realty Investment Trust of Rockville, Md., once a leading proponent of New Urbanism projects, seems to have met its Waterloo in San Jose, Calif. There, it has been reconstructing a former shopping center into a mixed-use complex called Santana Row. The project has faced difficulties, including a fire last year that delayed the opening of Santana Row's apartment units; a recession that hit the Silicon Valley area particularly hard after the project had begun; an aggressive construction schedule, and Santana's location very close to high-end Valley Fair mall.

“You can't predict what happens over a period of time,” says Federal Realty spokeswoman Kris Warner. She insists that the neighboring mall is not a problem. “From the very beginning we had a great relationship with them,” she says, pointing out there is now a shuttle service between the two properties.”However, she admits that “we learned some lessons.”

They were painful lessons that helped prompt Federal Realty CEO Steven J. Guttman to leave his job four months early. He resigned, under fire, in late 2002 after criticism from analysts for concentrating too much of his REIT's capital in a single slow-yielding investment. But Guttman was recently quoted as saying he thinks, “long term, it's going to be one of the top real estate developments in the United States.”

Even so, six months before the fire destroyed the Santana Row apartments, Federal unveiled a new business plan under which it would stop ground-up development, including street retail, and focus on growing the income-producing properties in its portfolio, which includes traditional community shopping centers. At the time it said it would, however, remain committed to Santana Row, which has drawn an impressive array of retail tenants: Gucci, Tourneau, Ann Taylor Loft, Anthropologie, BCBG Max Azria, Bottega Veneta, Burberry, Chicos, Cole Hahn, Diesel and others. Hotel Valencia, a boutique luxury hotel with another branch on Riverwalk in San Antonio, opens there this month.

Will Fleissig, a co-founder and principal with Continuum agrees that profitable demalling requires a long-term outlook, and forces developers to deal with a number of conflicting objectives. “To make these centers really work properly and create the value added,” he says, “you have to put in all the amenities such as plazas and streetscaping, and that costs a hell of a lot of money.” So despite the need for amenities, “you want to phase them in over time.” Completion of a demalled property can take seven or eight years, he warns. That's just the kind of time frame Federal's eager shareholders wouldn't accept.

Another issue is complexity. Even the planning phase of a demalling project can be painfully long, Fleissig says. “In the case of Belmar, we had to work for close to two years just to help people understand why their beloved mall was not going to function any more.” Fortunately, Lakewood was “a city of 150,000 with no downtown,” and “they wanted a new downtown.”

“The real homerun happens in the later phases, where you've basically put in the vast majority of the infrastructure,” Fleissig adds. The problem, however, is that many publicly-owned REITs can't afford a “later phases” approach. Investors put money in these issues for steady, predictable returns, based on the cash flow of productive retail properties. So who will finance the demalling of America? “My guess is it will be more entrepreneurial private investors,” Fleissig says, “They tend to be a lot more patient.”

Continuum, itself a privately held developer, is precisely that kind of investor. “The financing for Belmar, except for bank construction loans, is all internal equity from our partners,” and from Continuum's privately-held parent company, the Pioneer Companies, says Gougeon.

Shoring Up a Veteran Mall

A Main Street-inspired makeover is in the works for Bayshore Mall in an affluent Milwaukee suburb. Built in 1954, Bayshore sits on a 35-acre site in Glendale. There was no room for expansion. So the City of Glendale acquired an additional 10 acres, to be sold to the developers for cost. Dallas-based mall owner Corrigan Properties is joint venturing with Steiner+Associates, the Columbus, Ohio-based developer of the Easton Town Center.

This strategy not only doubles Bayshore's size to 975,000 square feet, but also helps redevelop the city's aging commercial district south of the mall. The new scheme calls for demolishing 100,000 square feet of the old mall, and building 575,000 square feet of new space at an estimated cost of $100 million.

Modeled after Easton Town Center, Bayshore is intended as a lifestyle and entertainment center, with freestanding buildings organized along a traditional city street.

Corrigan is also building 25 townhouses on the eastern edge of the mall site, to provide a buffer between a new parking structure and a nearby single-family neighborhood.

Revamping a Valley Girl

The Sherman Oaks Galleria in San Fernando Valley is blessed with an affluent client base and cursed with a horrid space — a hemmed-in tract hidden behind a pair of ordinary office buildings. There was no room to build a traditional Main Street lifestyle center or bring in a department store to compete with nearby regionals.

So the owner, Douglas Emmett Realty Advisors of Los Angeles, decided to build up its successful theater complex and restaurants and increase the visibility of the retail portion of the complex. It replaced one of the office towers with a Tower Records store resembling a ship's prow sailing into the intersection of Ventura and Sepulveda boulevards. Next to the “prow” is an open walkway that leads into the center of the now open-air project with several street-like arrangements of shops. The mall that had been invisible from the boulevard now is a flamboyant marker for an important intersection.

Emmett says the budget was “well north of $100 million.”

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