The Evolving Demand for Retail Spaces

James Bond & Anthony Austin

Google Inc. recently announced plans for new office space in West Los Angeles. Scouting and developing new office locations is nothing new for this multi-billion dollar conglomerate. What is different about this deal is that the property is currently in use as a shopping mall. With retail bankruptcies and restructurings being announced with some frequency, it’s no surprise that some shopping malls and retail properties are undergoing a transformation. These can be tough projects, however. It is challenging to get a full center emptied for redevelopment, and then once vacant, to have a creative vision to put the space to use for something other than a brick-and-mortar retail location. 

In this article, we explore what you need to know about the new prospects for shopping mall spaces, challenges and opportunities with redeveloping them, the outlook if financial structuring is involved, and how this trend could change the retail real estate landscape in 2019 and beyond.

Not “one size fits all”

In today’s challenging retail environment where some analysts estimate that 20–25 percent of shopping malls will close by 2022, some owners are getting innovative. Some have no choice other than to completely redevelop their projects for entirely different uses, while others are taking a different approach to incorporate unique office spaces into successful retail environments.

An example of the latter is Scottsdale Fashion Square in Arizona where Macerich just rolled out a coworking space with Industrious that will bring office use into the middle of a thriving retail environment. This shows that shopping mall owners are getting creative to diversify their tenant mixes with the goal of minimizing vacancies over the long term and increasing business for their existing retail tenants as well as driving traffic to their locations.

And this is not just a phenomena for malls. WeWork announced it would take a substantial stake in the iconic Lord & Taylor building on Fifth Avenue in New York City and use part of the property for its headquarters.

In the long run, however, redevelopment will require personalized approaches that cater to style, accommodation and the changing technology needs of a much broader audience of prospective tenants. Consider just how different the investment, zoning and contract needs would be to reconfigure a shopping space to become a large-scale distribution warehouse or residential space.

Underlying drivers

 The trend to use shopping mall spaces in creative new ways is driven by the fact that these spaces have not thrived the way they once did. This impacts not only the retailers, but also the communities where the retail hubs are located.

Many shopping centers fail because the surrounding community has lost an economic driver and, therefore, whether the redevelopment will make sense economically is a difficult prospect that needs to be carefully examined. These conversions, however, can also be a strong driver to local communities that have lost some economic muscle, while also potentially creating an increase in support jobs. 

Redevelopment vs. Closing

Many developers are actively considering the options for their spaces to stay ahead of a contracting retail market that’s being replaced by e-Commerce buying habits.

For those working to shift the nature of the space and the tenants they can attract, it’s important to consider the differing needs those business have, and how it will affect the way future deals are structured when it comes to technology, security, financing and lease terms.

When it comes to closing malls, the scenarios are clearly different and generally happen in one of two fashions: (1) They either are turned over to lenders voluntarily or through foreclosures or (2) there is a bankruptcy filing.

Bankruptcy routinely results in a liquidation of the assets to maximize the value. If the owner avoids a bankruptcy, then a receiver is often appointed to take control of the property and manage it until title to the property is transferred to the lender.

For non-distressed assets, the shopping center owners have to wait for all of the leases to expire or engage in early buy-out negotiations with the tenants. This presents a challenge for developers hoping to evolve the spaces.

Additionally, redeveloping a major shopping center requires significant capital and plenty of time. In order to secure the necessary financing for the redevelopment, the shopping center owner will likely need to have secured an agreement with the future occupant of the soon-to-be redeveloped project.

Planning for future flexibility

 Regardless of why and how the properties are redeveloped, the outside interest in these spaces could mean increased competition and rising prices. It could also lead to new opportunities for developers who, in the future, might try to intentionally develop shopping centers as mixed-use properties with flexibility in mind at the start.

Whatever the future brings for malls and retail spaces, one thing is for sure: Creative solutions will be required on all fronts to meet new needs in a rapidly changing world.

This article was co-authored by James Bond, director and chair of the Real Estate Practice Group, and Anthony Austin, director, Financial Restructuring, Bankruptcy & Creditors’ Rights Practice, at Fennemore Craig, a leading Mountain West regional law firm.