The pandemic is changing how shopping malls are built, in perhaps the most disruptive retail environment in modern times.

Developers have replaced the vacant big units with a mix of retail, dining, entertainment, fitness, co-working and healthcare options. They have also added apartments, hotels and offices to the properties – often to make better use of vacant parking lots and create built-in traffic generators – and they are beginning to create distribution and self-storage hubs at malls as more people purchase their goods online.

In June, Washington Prime Group agreed to turn a former Sears location at its Morgantown Mall into a logistics, distribution and fulfilment centre for a healthcare network serving West Virginia University.

“As more department stores become vacant, we do need to re-envision the future of mall properties,” said Mr Greg Maloney, president and chief executive of the Americas retail unit of Jones Lang LaSalle.

“Will it be 100 per cent retail? No, but its success still comes down to location.”

Long before the coronavirus arrived in the US, many malls, often overburdened with debt and struggling with vacancy and declining values, were fighting to stay alive.

The number of malls has declined to fewer than 1,000 today from 3,000 at the turn of the century, according to Mr Nick Egelanian, president of SiteWorks, a shopping centre and retail consultant. And, he predicts, only about 200 of the strongest malls with the best locations will be left by the end of the decade, if not sooner.

“The true mall of the future will incorporate a mix of uses,” he said, “and the retail will be downsized: If it has 2 million sq ft today, it may only need 1 million sq ft tomorrow. But it’s going to be painful getting there, and the ones that survive are going to need a lot of capital.”

The ideal mall, he said, is one that is surrounded by offices, high-rise residences and hotels.

Some malls will emphasise luxury and cater to the affluent, observers add, while others will focus on middle-market consumers with stores that sell budget products.

This off-price strategy is one that malls of higher quality previously avoided, said Mr Vince Tibone, a senior analyst covering retail for Green Street Advisors.

“In the minds of the owners of top malls, there was a higher and better use for their properties,” he said. “But there are a lot fewer options to backfill space today, and even those malls are looking to just get tenants into vacancies.”

To better position itself for the future, one middle-market mall owner, Pennsylvania Real Estate Investment Trust, has sold 18 malls with significant department store exposure over the past five years and is reinvesting more than US$885 million (S$1.21 billion) in proceeds into its core assets.

Among other projects, the real estate trust sank US$210 million into the Fashion District, a 1.5 million sq ft mall in downtown Philadelphia that it owns with Macerich. A number of new tenants joined the roster when it reopened last year, including an AMC Theatres cineplex and flexible-office provider Industrious.

Other non-retail companies continue to show interest in the company’s properties, said Mr Joseph Coradino, chief executive of Pennsylvania Real Estate Investment Trust, which is based in Philadelphia and owns 21 malls primarily on the East Coast.

“When you step back and look at malls, they typically have phenomenal locations at major intersections and highways,” he said. “Certainly, the mall business today is different than it was a year ago or even six months ago. But I don’t think the success of malls is a question of apocalypse or death. I think it’s really an evolution.”

Yet, like many malls that have been repositioned in the past decade, Fashion District boasts a high percentage of food and entertainment tenants. Plagued by questions over how soon consumers will feel safe returning to them, these businesses are operating at partial capacity nationwide, and some are closing.

Observers anticipate that entertainment and restaurants will continue to generate traffic over the long term, although they acknowledge that full recovery depends on a coronavirus vaccine.

Still, restaurants and entertainment have become so ubiquitous that they have failed to live up to the expectations of many mall owners, said Mr Scott Stuart, chief executive of the Turnaround Management Association, an organisation in Chicago that represents restructuring professionals.

“While the uses have filled gaps in malls, they’re beginning to look like short-term solutions,” he said. “Consumers have a choice to go to a mall or some other setting to experience them.”

Some owners, however, will be forced to recognise that their locations no longer fit in the retail world, Mr Egelanian said. But that may produce opportunities to start new industrial, housing, office or mixed-use developments from scratch.

“There may not be any time in the last 100 years when so many 100-acre (40.5ha) sites located at that perfect intersection have been available for redevelopment within such a short period of time,” he suggested. “They will have value for many uses and could be big economic generators for their communities.”

Source: https://www.straitstimes.com/business/invest/malls-will-no-longer-be-the-same-after-covid-19

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