Malls are dying. There aren’t enough homes. Is there a solution?
This story was previously updated to fix the description of a tax credit.
The Prospect Mall on Milwaukee’s east side had struggled for years, but the rise of e-commerce finally did it in. The shopping center sat vacant from about 2006 to 2012, when a local firm, Joseph Property Development, bought it with a turnaround plan in mind.
Now the old mall has a new life as The Overlook on Prospect, a modern apartment building with spacious one- and two-bedroom units renting for $ 1,350-1,750 per month.
Malls have been dying for years. And all across America, not just in coastal hotspots, home prices and rental costs are surging as a dearth of available places to live chokes local housing markets.
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Scott Crowe, chief investment strategist with CenterSquare Investment Management, estimates that 44% of current mall retail space will be either shuttered or “repurposed” over the next 5-7 years.
Crowe looks at recent real estate industry developments like Brookfield’s BPY, +0.45% bid for GGP GGP, -0.04% as evidence that the industry is realizing that a lot more needs to shake out. “There’s a better use for much of this real estate,” he said.
That said, Crowe cautions that it’s not as if developers have suddenly uncovered “humongous untapped economic value.” Lower-quality malls probably can’t be helped, and will likely need to be shut down, he said. And conversions are always time-consuming and extremely costly, Crowe noted.
That’s something Quintin Primo III, chairman and chief executive of Capri Capital Partners, a Chicago-based national investment firm, knows a lot about.
In 2006, Capri bought the Baldwin Hills Crenshaw Plaza mall in South Los Angeles on behalf of investors. “It was always our intention to redevelop it into something much greater,” Primo told MarketWatch. It took years to obtain the necessary approvals and the project had to endure California’s fiscal crisis and, last year, the loss of a Wal-Mart WMT, -0.11% .
The project will boast 300,000 square feet or 961 units of mixed-income housing, along with office space, hotel rooms, and retail. The desire to offer housing is what drove the redevelopment plan of what Primo calls a “unique asset.”
What makes Baldwin Hills Crenshaw Plaza even more unique is that it’s a transit-oriented development. Capri donated land to the LA Metro system to construct a metro station on the property.
“As retail seeks to reinvent itself it will need to move away from the car,” Primo said.
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While Capri isn’t looking for another such redevelopment opportunity, Primo believes other investors “have no choice” but to find new purposes for existing retail space. One challenge, he thinks, is that the bigger, higher-end real estate markets have been “over-supplied” with apartments after years of surging multi-family construction.
“We’re beginning to see rent concessions, greater equity requirements on the part of construction lenders, increasing caution as rents flatten out as a result of concessions, lease-ups being slower,” he said.
Rent grew 3.7% compared to a year ago in October, the Labor Department said. While substantial, that’s the slowest annual gain in over a year. Annual increases have been slowing since last December, a possible sign that enough supply is finally becoming available to help ease some renting pressures.
Another massive mall-residential play real estate analysts are watching closely is also in southern California: Westfield’s San Diego-based UTC, when it’s expanded, will include 300 apartments.
Sam Khater, chief economist for CoreLogic, thinks mall-apartment conversions are smart, and dismisses suggestions that the housing market will have too much inventory any time soon. “There’s plenty of supply on the high end,” he said. “But we need housing all across the income spectrum. There’s clearly a market failure and a government failure to provide housing for middle-income Americans.”
Khater also thinks redeveloping dead retail space into productive use is the perfect opportunity for governments to think creatively about public policy “nudges” both at the development and the individual level. The Federal Housing Administration previously offered “location efficient mortgages” that could be offered at a lower rate for homeowners who don’t have a car, he noted.
“This is where it gets interesting,” Khater said.
Still, as Trulia Chief Economist Ralph McLaughlin points out, local governments often have their hands tied, not just by regulations and restrictions, but also by current neighbors.
“Not in my backyard” protests often spring up when current residents believe new developments will cheapen the value of their property, bring an influx of new neighbors, or both, even if revitalizing vacant space and reaping productive tax revenues would seem to outweigh those concerns.
Milwaukee didn’t face such opposition when the Prospect Mall was re-developed, Misky said, perhaps in part because its location was favorable to apartment living.
So Milwaukee is trying it again. The downtown Grand Avenue Mall was built in the 1980s but has struggled over the past decade. A new buyer arrived about two years ago, Misky said, and realized a variety of uses, from residential to office to restaurants, was the best approach.
While Misky is glad to see the redevelopment and intrigued by the experimentation, he’s struck by one irony as dead retail space gets revitalized across his city. Milwaukee was the original home of the Kohl’s KSS, +0.95% chain of bargain stores – yet the city has no Kohl’s downtown.
“We also don’t have a Target TGT, +0.42% downtown, and the reasons we’ve been given is there just isn’t enough density,” Misky said. “But we keep adding people to downtown. At some point there’s a tipping point, but I guess we just haven’t seen that yet.”