Terry Montesi Featured
Wall Street Journal
Visitors used to flock to the Highland Mall in Austin, Texas, around the holidays to stroll through the city’s first enclosed shopping complex and admire the giant Christmas tree crafted from poinsettia plants.
But this holiday season, no shopping will be done there. Workers are converting the 600,000-square-foot structure into a campus for Austin Community College with classrooms, lab space and a culinary arts center.
Austin’s economy is strong and its population swelling, but Highland couldn’t attract enough shoppers to stay afloat.
“Competition came up and killed it,” said Matt Whelan, principal at developer Red Leaf Properties LLC, which is working with the college on the project.
An era of relentless expansion for American shopping centers is coming to an end as a toxic brew of overbuilding, the rise of e-commerce and a wave of retailer bankruptcies force landlords to reimagine once-lucrative properties.
Some owners are converting struggling malls into apartments, offices and industrial space, while others are turning big chunks of retail space into parks and playgrounds to keep shoppers interested.
“You have to create an environment that people want to come to,” said Tony Ruggeri, who eliminated about 50,000 square feet of retail space to create an open-air plaza at West Manchester Town Center in York, Pa., which reopened last year.
By year-end there will be 48.3 square feet of retail space per person in the U.S., down from the record of 49.8 set in 2009, according to real-estate data firm CoStar Group Inc. This year marks the sixth consecutive annual drop, and CoStar forecasts declines through at least 2020.
The decline has affected most categories of retail real estate, including strip centers and convenience stores, local shopping centers and large malls, according to data from the International Council of Shopping Centers, a trade group. It comes after decades of aggressive expansion. In all, the amount of retail square footage per person swelled by 54% between 1970 and 2009, according to the ICSC.
“The fact is that we built far too much,” said Suzanne Mulvee, a research director at CoStar.
The recession of 2007-09 left many retailers vulnerable as shoppers reined in spending sharply and then only slowly loosened their purse strings in the years since. Only one mall with at least a million square feet of leasable space has opened in the U.S. since 2008, according to Green Street Advisors, which tracks retail real estate. By contrast, over the decade ending in 2005, 54 such properties were built.
“We woke up one day and Circuit City [Stores Inc.] was gone,” said Greg Maloney, chief executive for retail in the Americas at real-estate firm Jones Lang LaSalle. The pain has continued through this year, with RadioShack Corp., American Apparel Inc. and Wet Seal Inc. all seeking bankruptcy protection.
Online shopping, meanwhile, has more than doubled its share of all sales, from 3.6% in the third quarter of 2008 to 7.4% in the same period this year, according to Census Bureau figures. E-commerce is growing at a 15% annual clip, the most recent government data show, taking another bite out of the property market.
The weak bricks-and-mortar shopping climate is forcing landlords to think outside the big box. Terry Montesi, founder of Trademark Property Co., left a grove of oak trees in the middle of a development called Waterside he is building in Fort Worth, Texas, which will include a Whole Foods Market and an REI store, as well as apartments and office space.
The decision meant giving up about 20,000 square feet of retail space, but allowed him to link a public area around the oak trees to a trail along the nearby Trinity River.
Retailers are drawn to that kind of attraction, Mr. Montesi said. “People will pay for the experience,” he said.
The shrinkage could pose problems for retailers as well by pushing up rents for existing space, sparking increased competition for prime locations and forcing retailers to become more efficient about the space they use, analysts said.
“At some point, retailers will throw up their hands and say, ‘We can’t pay these rents,’” said Jesse Tron, a spokesman for ICSC. That will spur retailers to ask developers to build more retail space, Mr. Tron said.
Even massive shopping centers such as Randall Park Mall in North Randall, Ohio, are being reimagined.
“People would come here from all over,” said Charles Horvath, the village’s building commissioner. “There were more than 8,000 parking places, and during the holiday season people would fight to get into them.”
The mall closed during the recession amid increased competition from newer properties in the area. This year, developer Stuart Lichter and a partner tore down the mall, which they plan to replace with manufacturing sites and warehouse spaces for industrial customers.
“The country is just littered” with obsolete retail space, Mr. Lichter said.
John Frew, a developer based in Denver, is aiming to eliminate at least some of the excess. Mr. Frew took over the struggling Westdale Mall in Cedar Rapids, Iowa, in 2014 and the main mall building was demolished earlier this year.
The new Westdale will include a hotel and offices, as well as space for people to walk around the property, said Mr. Frew. New stores have already started to open at the mall, and when the project is complete there will be about a third less retail space than there was before.
“We think it fits the market,” said Mr. Frew.