Why Does It Take So Long to Redevelop Malls?
Many malls that are struggling in America are experiencing a slow decline. This can last for years or even decades. Many malls once thrived on foot traffic and economic vibrancy. However, they are now in a kind of zombie state with only half the department stores and small retail outlets remaining open and the rest shuttered.
Why Have Malls Declined?
Real estate professionals agree that brick-and-mortar retail activity has declined due to three main reasons:
The rise of e-commerce.
The shift from buying goods to purchasing services and "experiences"
Too many stores per capita.
It is a time-saver to order items online and have them delivered, and this applies to everyone, not just working parents. They are at their most expensive years of life as they furnish and raise children. People shop less often than in the past, but they still go to shops for manicures and classes in local shopping centers. Over the past ten years, these changes have decreased foot traffic to retail centers, particularly malls. But, even before the shift to eCommerce experiences, the U.S. was already moving towards becoming "over-retailed" as specialty and department stores opened multiple locations. Some retailers opened six stores instead of just two within a 30-mile radius. This resulted in less foot traffic and more transactions at each store.
Why Does Mall Redevelopment Take So Long?
These forces, along with others, have been in play for decades and have affected all types of shopping centers. However, malls have been the most severely affected. So why is it that mall owners have struggled for decades to keep up with consumer trends and to change their retail mix or to completely redevelop their properties?
LoopNet interviewed several real estate professionals to discuss some of the less-known aspects of mall ownership and operations. These elements are important in the challenge of repositioning or developing malls. These conditions can often be intertwined, which adds more complexity to the problem. However, they are separated in this article for explanation purposes. Specifically:
Multiple parties own malls.
Complex ownership agreements require multiple parties to consent.
Complex retail leases can hinder mall operators' ability to refresh and/or redevelop.
Multiple Parties Own Malls
Department Stores
It is often not understood that mall structures and their surrounding parking and road facilities are seldom owned by one entity. For example, Simon Property Group, a major mall operator, may lease or own the inline space occupied by smaller retailers that spill onto the mall concourse. However, in older malls, department shops often own their boxes, National department store chains such as Macy's, which occupy the "boxes," or locations at the end of the mall, often own their facilities rather than leasing them.
So why would a developer surrender ownership and, by extension, control of the company?
Mall developers who wanted to attract national chain stores used this shared ownership arrangement. These department stores are known as "anchors" and were used to incentivize shoppers to visit the mall. Developers understood that the anchor department stores set the tone and brand for a mall's shopping center when it first opened. For example, Sears and JCPenney were anchored by retailers and eateries catering to middle-class consumers, while wealthy customers anchored Saks Fifth Avenue or Neiman Marcus.
Developers could lease "inline," which is concourse-facing space to smaller retailers that depend on mall anchors for foot traffic, once the mall anchors had been in place. Inline retail was carefully planned to appeal to the same demographics as the department stores. These anchors were essential to the brand and financial viability of the mall, so developers were willing not to just lease a portion of it but to sell it to a department shop.
The department stores could not use the entire building as they wished. Therefore, reciprocal easement agreements were created to ensure that the department store boxes could integrate with other shops in the mall.
The challenges that this once-beneficial arrangement presents for mall redevelopment plans. For example, although you would like to believe that you can work with only one owner for a mall, you may find that the original developer sold two anchor boxes and now owns and leases the other two. This is even more complicated when you have to deal with co-owners who also own leases.
Out Parcels: This complicates ownership because mall properties often include "out plots," or parcels of land scattered around the parking lot and that are owned by banks. Other private entities, municipalities, or individuals may also own parking structures, ring roads,, or circulation routes.
Agreements are often made when assembling land for a mall. These agreements may be with parties who are selling or contributing land in return for ownership rights in the mall.
The 1970s example of a strip mall but noted that other shops and land were added over time to create a larger parcel. There were five to six reciprocal easement arrangements between different parties, and all have rights. The result was very confusing and complicated. Although facts may vary from mall to mall, the result was the same: Mall owners often need to obtain third-party consent before making changes to their malls.
The two main types of legal agreements that cement relationships between mall owners and retailers are Reciprocal Easement Agreements (REAs) and Outparcel Owners. Reciprocal Easement Agreements (REAs) are usually executed between the mall owner/developer and each owner or outparcel owner. Complex retail leases often exist between the mall owner/developer and the retail tenants.
Reciprocal Easement Agreements
REAs are generally used to establish the conditions, covenants, and restrictions that must be followed for large-scale development projects. They also govern who the parties to the agreement have to do, whether they are developers, landlords, operators, or any other entity. These terms address issues such as parking access and where exits and entrances are located. In addition, these terms give retailers assurances that their property and parking spaces are available to them and will not be blocked by any neighbor who may wish to use them for construction or temporary circus tents.
REAs also cover common area improvements, signage locations, building maintenance, taxes, and taxes. These include information about what the parties can and cannot do with respect to these items and who they should contact in the event of a problem. They also outline the process they will follow to resolve any problems. Sometimes, an agreement may specify how to amend the REA if necessary.
Restrictive easement agreements can be indefinitely effective and "run with the land," binding future owners. Although the REA may be for a shorter term, they are often able to remain in effect for a long time. You can change REAs by using legal remedies such as quieting the title, abandoning or releasing the easement. However, these approaches can be costly, time-consuming, and complex.
These agreements are a hindrance to redevelopment.
Multiple parties must consent to make significant, and sometimes insignificant, changes. These arrangements are complicated by the fact that not all parties have access to each other's agreements. Three owners might need to resolve an incident here, while another group of owners may need a solution there. This is before the larger issues can be resolved collectively by all mall owners.
Complex Retail Leases
Retail leases govern the relationship between tenants and landlords. Retail leases in commercial real estate are more complicated than industrial or office leases. This is due to restrictions on what the tenant may sell, restrictions on activities by other tenants, and co-tenancy clauses. These clauses provide protections and restrictions to retailers, depending on how other retailers perform in shopping centers or malls. If an anchor tenant is terminated or leaves, the other tenants can be permitted to pay lower rent, reduce operating hours, or terminate their lease.
Occupancy clauses allow retailers to make decisions based on other factors in the mall. For example, a department store might be able to pay lower rent if the occupancy of small retailers drops below a specific number until it regains full occupancy. If a department store, or a group of department stores, leaves, inline retailers might be able to extend their leases for a couple of more years at lower rates.
Legal clauses allow tenants to have input on the co-location of other tenants in shopping centers or malls. For example, one coffee shop might oppose another coffee shop taking up space because it sees it as a competitor. On the other hand, a pastry shop that sells coffee might be considered complementary, so it would not object to the existing coffee shop leasing space and colocating in the center.
Leases also clearly state that a tenant must cease to be in business. This limits the mall operator's ability to fill space with something newer or more modern than what was possible in a 10-year-old lease. As a result, many malls have a mix of very outdated retailers due to the difficulty in making these changes to their retail mix.
Some clauses are also known as prohibited use clauses. They state that certain businesses cannot be accommodated in a mall or retail center, such as vaping venues or nightclubs. But, it can be difficult to understand prohibited use clauses if too much or not enough detail is given. For example, a lease may state that heavy parking is prohibited but not give details as to what heavy parking means. Is it a lot of cars that are turned over every 30 min, fewer cars that turn every two hours, or something else?
Other cases may include prohibited use clauses that list examples of heavy parking, such as for sports or fitness centers. In addition, mall owners have had to deal with specific language when trying to fill space with other retailers or service providers in the past. Therefore, it is important to consider the unintended consequences that lease language can have on your business.
Mall Operators created these Complex Leases.
Aside from critical mass, control is one of the most important assets that mall owners have. They controlled the environment, messaging, and marketing. This allowed malls to attract many retailers, who wanted to know their neighbors to help them create branding and experiential synergies. Owners used these complex lease agreements to encourage retailers. These lease agreements allowed rents and concessions for retailers to fluctuate according to retail synergies or foot traffic. The leases allowed retailers to have greater flexibility, which could directly impact their bottom lines. If foot traffic dropped, this could potentially reduce their sales.
Even though malls might be considered inferior due to their lack of charm or atmosphere, the allure of control and knowing your neighbors made it a compelling opportunity. This was a compelling opportunity for them to sign complex leases. They tie their fortunes with those of nearby retailers, so small tenants benefit from the department store aggregation and vice versa.
Redevelopment: The Greater Obstacle
Complex retail leases and reciprocal easement agreements are key to mall owners' longevity. Adaptability is key.
As mentioned above, landlords have been unable to re-tenant malls with more modern uses and retailers in many cases. This has led to an outdated retail mix that has remained. These outdated retail environments have failed to attract shoppers, further degrading malls. Some malls could have survived the state of decline and full-blown reconstruction if the retail mix had been simpler to update.
These lease structures have certainly hindered re-tenanting, and to some extent, redevelopment. However, reciprocal easement arrangements may be a greater obstacle to redevelopment.
She pointed out that most leases do not give tenants the right to prevent landlords from using the center beyond its premises. The tenant might be able to terminate the lease, pay less rent or stop operating. Although these remedies can be painful, they won't stop a redevelopment.
Mall owners who recognize that redevelopment is necessary can plan for reducing cash flow and welcome the possibility of vacancy to allow construction to move forward. Once an owner has started a process toward redevelopment, it doesn't care if any of the tenants pay less rent, terminate or cease operating; what the owner cares about it is that the tenant doesn't have the legal right to stop the owner from doing something by withholding their consent.
She also noted that a typical lease is for the short term. However, a reciprocal easement agreement can be made with the land. The reciprocal easement agreement can be indefinite or 50-year terms. Mall redevelopment efforts should focus on this.
