by: Kennedi Templeton

When depicting Austrian architect Victor Gruen’s notable rise to fame, Malcolm Gladwell commented, “Gruen didn’t design a building; he designed an archetype.” Gruen’s work, the first introverted indoor mall, became an international icon. The success of the indoor mall remained relatively unchallenged until the notorious retail apocalypse began and was followed by the thunderstorm of COVID-19. Department stores filing bankruptcy have further accelerated the classic indoor mall’s decline and led many to close as they lose traditional anchor tenants. Investors are showing increased sensitivity to the future of the retail asset class with more than $40 billion in CMBS loans for shopping malls coming due from 2022-2024 ⁽¹⁾ Despite many fears over the death of the indoor mall, lifestyle centers serving their community as a place to gather regularly (for reasons beyond shopping) still show signs of hope. Connectivity between consumers remains essential as recovery from the pandemic revealed that there is no substitute for human connection. While customers and investors shift away from the traditional indoor mall, people are still gravitating toward the “togetherness” provided by open-air malls classified as lifestyle centers. By offering neighborhood connectivity, these lifestyle centers still serve as both profitable investments and anchors in their community.

Green Street’s November Commercial Property Price Index reports that malls have lost more value in the past seven years than any of the nine other asset classes used in comparison: a staggering 48% decline in property value ⁽²⁾. In Q2 2022 alone, super-regional malls lost 1.3 million SF in net absorption, while in contrast, lifestyle centers saw absorption rise to more than 1 million SF. Demand for lifestyle centers continues to increase as consumer preference shifts towards seeking a recreational experience in retail. From Q2 2021 to Q2 2022, foot traffic for experiential tenants increased by 39.4%, while soft goods, electronics/office, home, and hobby tenants lost traffic with declines ranging from -3% to -12.9%⁽³⁾. This data suggests that as consumers seek entertainment from their in-person retail experiences, lifestyle centers will become increasingly more attractive assets compared to empty-ing traditional malls. Even in the face of rising gas prices and inflation, open-air lifestyle centers showed visits increased 6.3% nationally from September to October of this year ⁽⁴⁾. Lifestyle centers inviting people to gather for reasons beyond retail—such as farmer’s markets, small concerts, and holiday gatherings—show promise and longevity. It is their ability to provide neighborhood connectivity that still brings in a year-round regional draw.

Repurposing retail spaces within indoor malls to bring in more of the community has recently gained traction in an attempt to revive the popularity of the traditional mall. With many Gruen-esque indoor malls now lacking the ability to keep retailers alive on their own, owners have begun adding mixed-use operations such as apartments and entertainment, with 32 indoor malls across the country even including health care services ⁽⁵⁾. A shift away from the retail-only mall allows owners to bring in non-traditional tenants that keep the building financially viable and offer a unique sense of place. However, this rise in popularity of alternative uses in malls further indicates that the traditional indoor mall is not financially viable on its own. Without a vision to promote neighborhood gatherings and bring people together, many indoor malls have lost ground and likely will continue to decline. In the wake of the pandemic, families, and customers continue to gravitate towards togetherness and activity in public. A partnership with the community is thus vital for the success of malls today, which is why lifestyle centers will continue to attract the institutional investment that is leaving traditional shopping malls. Sturdy underlying market fundamentals indicate that developers and investors will continue to see favorable returns on these assets. Lifestyle centers stand at the forefront of the opportunity to provide connectivity to their communities and, because of this, will likely continue to attract investment.

We pride ourselves on our ability to finance many different types of retail projects. Our experience ranges from the recapitalization of existing malls to the financing of inline power centers, neighborhood retail centers, and the repurposing of struggling retail assets. Knowing what capital is available for your strategy is key to getting the right project off the ground and we can quickly assess the financing options to determine which direction to go.

References:

https://www.bnnbloomberg.ca/cmbs-market-faces-crunch-as-40-billion-of-mall-debt-comes-due-1.1663360

https://www.greenstreet.com/insights/CPPI

https://www.us.jll.com/en/trends-and-insights/research/retail-market-outlook

https://www.placer.ai/blog/placer-ai-mall-indexes-october-2022-update/

https://fortune.com/2022/04/25/shopping-malls-health-clinics-medical-care-conversion-covid-19/