Indoor Malls Are Prime Candidates for Mixed-Use Redevelopment

Before the pandemic, the biggest uncertainty in the commercial real estate market was how to redevelop indoor malls. Malls have been waning in popularity for years, and many have already been repurposed into other asset classes. Research from CoStar shows that these properties are prime candidates for redevelopment thanks to rapidly increasing vacancy rates, which are expected to continue to grow this year.

Mall vacancy rates fell 150 basis points last year, and CoStar expects that they will decline an additional 170 basis points in 2021. “Throughout a substantial portion of the pandemic, up until the vaccines were made widely available, many consumers were hesitant to be inside with large groups of people,” Robin Trantham, senior consultant at CoStar Advisory Services, tells GlobeSt.com. “Given that most traditional malls across the country are enclosed, foot traffic to malls dropped dramatically during the height of the pandemic.”

But, that isn’t the only reason the vacancy rate has increased. Trantham says that malls have a higher concentration of traditional retailers, which are facing steep competition from ecommerce. “As e-commerce sales growth boomed during the pandemic, the average mall tenant sustained a larger impact to brick-and-mortar foot traffic and sales,” he says.

As a result, malls have become a top candidate for redevelopment projects—a trend that was emerging before the pandemic but certainly accelerated by it. “Given that the pandemic has heavily impacted the U.S. mall market, mall owners across the country are attempting to get creative with how they improve performance at their sites and many are going the route of either adding new, complimentary uses surrounding their existing retail or demolishing the existing retail and converting to an entirely new use altogether,” says Trantham. “In addition, the sheer size of most malls in the U.S. gives developers several options when it comes to what to redevelop the mall into.”

CoStar looked at 37 malls in the US that have redevelopment projects underway, and found that all mall asset qualities are being redeveloped. However, class-B malls have been the primary candidates for redevelopment, accounting for 54% of the mall redevelopment projects reviewed. Class-A malls represented 32% of the redevelopment project, while class-C malls represent 14% of redevelopment projects.

While malls can be converted into any asset class, mixed-use properties offer the most upside. That is because assets on mixed-use sites generally garner higher rents. Apartments command 13.9% higher rents than apartments collected in non-mixed-use sites. The rents on a office and retail have a premium of 8.6% and 7.3%, respectively. “Mixed-use construction tends to create a synergy between the existing retail and other property types, whether that is apartment, office, or hotel etc. The retail is looked at by a prospective office or apartment tenant as an amenity and the retail tenants benefit from added foot traffic brought on by the increased density,” says Trantham.

Ecommerce activity—not the pandemic—is largely responsible for the trend to redevelop hotels. “I do think this trend would have occurred without the pandemic. Malls have been heavily impacted by e-commerce growth for the last several years and this alone would likely have been enough to push many owners and developers to consider redevelopment,” adds Trantham. “The pandemic likely just accelerated the trend.”