New Economic Realities   //   July 11, 2024

Developers turn to apartments to help revive aging malls, often replacing former department stores

As department stores close their doors, many malls have found a hot new anchor tenant to take their place: apartments.

Many mall owners are working to diversify their properties with entertainment, offices and educational tenants, but a study published last year by real estate firm JLL found housing was the most popular use in these projects, as nearly 54% of mall redevelopments in 2022 incorporated residences. The same study found about one-third of redeveloped anchor spaces in malls, most often former Sears stores, were scrapped for residential uses such as apartment towers.

Residential projects can reenergize retail properties with a new base of customers on site who can boost restaurants, fitness centers and other businesses and also address the nation’s housing shortage. Owners of former department store buildings have to decide whether to keep the box and renovate it or tear it down to make way for new construction. Pursuing housing typically means demolition.

Major mall owner Simon expects to spend roughly $1.5 billion building apartments and hotel rooms at its retail properties, CoStar News reported in May 2023. In May 2024, the company announced significant reinvestment in Fashion Valley in the San Diego area with 850 apartments and new luxury retailers.

“As we give back real estate through our redevelopment efforts, the big focus is on where we can add some mixed uses because we do think that what we did in Buckhead is having a tremendous impact on the overall value of that real estate,” Simon said in a 2023 earnings call, according to CoStar, referring to the company’s redevelopment of Phipps Plaza in Atlanta’s Buckhead neighborhood where it added a hotel, restaurant and fitness center.

Using bankrupt retailers’ real estate

Legacy Chicago department store Carsons used to be an anchor tenant at the Yorktown Center shopping center in the Chicago suburb of Lombard, Illinois. In 2018, when the company filed for bankruptcy and ultimately shut down all its stores that same year, mall owner Pacific Retail Capital Partners announced plans in 2022 with Synergy Construction to use that land for an open-air plaza with apartments next door.

PRCP manages about 24 million square feet of real estate nationwide and has owned Yorktown Center since 2012. Developers have already built apartments and townhomes around the mall on parcels sold by PRCP. According to Najla Kayyem, who runs marketing, communications and public relations for PRCP, the firm plans to start demolition and construction at the Carson’s site later this year.

Much of the indoor mall will stay intact, and an in-house design team will work with the architects and developers of the housing to ensure a consistent design throughout. The company also plans to bring events and activities to the park area. “What we’ve been doing is trading up and trading out,” Kayyem said. “Doing these types of things really increases our foot traffic, increases our sales, and it’s a place and space where people want to be.”

PRCP is similarly transitioning the former Galleria mall property in White Plains, New York, into a development called District Galleria, but in that case, the company decided mall renovations wouldn’t work and decided to completely transform the site, buidling new towers with a variety of uses and thousands of apartments.

Reviving struggling malls

Other developers see adding residences as a way to revive stagnant mall complexes.

CBL Properties, owner of about 95 malls and shopping centers nationwide, has proposed to add up to 249 apartments to a portion of the parking lot of Harford Mall in Bel Air, Maryland, after selling a former Sears store that closed in 2020 to another developer that then built an outdoor shopping center on the property. Stephen Lebovitz, CBL’s CEO, said the company has selected a developer who has yet to begin construction of the apartments and is in the financing process.

The mall has struggled in terms of sales and bringing in more national brands, according to Lebovitz. CBL added some outward-facing shops on a portion of the property that have done well because of the visibility and traffic flow, Lebovitz said, but the inner mall only had two anchors — Sears and Macy’s — and already lost one.

“It’s a small mall, I’d say probably not our strongest mall,” Lebovitz said. “It’s just not big enough to compete with some of the other malls in the market.”

The company plans to either keep the indoor mall long-term, hoping the apartments could help performance, or eventually convert more of the mall for use by outward-facing retailers along the lines of T.J. Maxx or Marshalls, or to other uses such as residential or office.

A long-term bet

While mall conversions have gained more traction over the past few years because of changes in the retail industry, James Bradley, principal of Seattle-based architecture firm GGLO, said his firm has been doing similar projects at underutilized retail developments since its inception in the ’80s.

A big challenge for the developers and architects behind these projects can be convincing people in surrounding communities to support a denser development with multiple uses, often having to address concerns about parking and traffic. But the projects may replace huge surface lots with an accessible gathering place the community didn’t have previously, potentially getting neighbors on board.

“We’re always encouraging our developers that we work with to think about what sort of open space they can provide that creates a bit of a civic heart to the development, something that is always available to those who live directly within the neighborhood but also is open to the surrounding neighborhoods too,” Bradley said.

Even with these hurdles, developers see residences as a way to reinvigorate real estate that’s already in high demand.

CBL’s Lebovitz said because malls are such large pieces of land, sometimes 100 acres, it takes a lot to keep them running. While other development may push further out into new, growing suburban neighborhoods, mall properties present an opportunity in already high-traffic areas.

“Malls, for the most part, they picked the best real estate 40 or 50 years ago when they were built; they’re still very desirable locations for infill,” he said. “You’ve got road networks, you’ve got infrastructure, you’ve got a lot of other uses around already.”