The future of the American mall may be playing out in a retail center that was almost a vestige of shopping's past.
Once the home to stores like Sears and Montgomery Ward, the San Jacinto Mall outside Houston would rather have a lot of empty air than retail space. Developers are creating two football fields worth of open space to hold events that lure crowds that stores can no longer guarantee.
Old school enclosed malls, often 1 million square feet of retail space that are trying to adapt to changing consumer behavior, are focusing on their one common strength: they were built on real estate with access to large population centers. Now those still prime locations are getting redeveloped by private investors and institutional developers into the newest incarnation: added offices and green space that can double as a concert venue to draw visitors who don't live far away.
Several projects such as San Jacinto in Baytown, Texas, Collin Creek Mall in Plano, Texas, Westfield Garden State Plaza in New Jersey and MainPlace Mall in California are being transformed as clothing stores have been hit hard by shoppers looking for convenience and lower costs from online shopping. Landlords, in turn, are increasingly replacing sluggish retailers with tenants that feature entertainment or other experiences you can’t get online like yoga studios, trampoline parks, gyms and restaurants.
"Collin Creek Mall, if not all malls, possess truly great real estate, which is defacto why the mall was built there in the first place," said Bob Young, executive managing director at Weitzman, a Texas retail brokerage, in an interview.
San Jacinto Mall is in Harris County, which added more residents than any other county in the United States in the past decade and covers enough space to fit the cities of Austin, Texas, Boston, Chicago, Dallas, New York City and Seattle with room to spare. The developer, Fidelis Realty Partners, is betting on all those potential spenders with the transformation of the 38-year-old mall into San Jacinto Marketplace, an open air district.
“The idea is to re-envision them into a mix of uses where the retail is significantly cut down as a percentage of the overall property mix,” said Justin Boyar, CoStar's director of market analytics in Houston, in an interview.
Fidelis Realty Partners bought the 107-acre mall that was in a state of disrepair in 2015 but long-term leases to tenants such as Sears, which didn't close its store at the mall until 2018, halted immediate redevelopment plans. Now, Fidelis Realty Partners has recently started demolishing the main structure of the 1.2 million-square-foot mall at the southwest corner of Interstate 10 and Garth Road in Baytown, which is about 24 miles east of downtown Houston.
The rebranding of San Jacinto Mall into San Jacinto Marketplace "will continue to be a long process," said Alan Hassenflu, president of Fidelis Realty Partners, in a statement, with the first phase expected to be completed around Christmas 2020. The project includes incentives from the city of Baytown and keeps the iconic "San Jacinto" name after the 1836 battle that resulted in Texas winning its independence from Mexico.
An outdoor mall can benefit from Houston's lack of snow and frost in the winter, but it could face challenges in the summer because the area averages about 92% humidity on any given day.
in Baytown, Texas. (Fidelis Realty Partners)
Given the sheer size of shopping malls, the players involved in the redevelopments are typically either institutional investors or wealthy individuals. Major institutional players are betting on the solvency of mixed-use malls. Brookfield, one of the nation’s largest commercial real estate developers and investors, acquired Chicago-based GGP Inc., one of the largest owners of U.S. malls, for $9.25 billion last year.
“They require patient capital,” Boyar said. “Brookfield’s acquisition of GGP is a major indicator that this is what the smart money is doing."
Another example includes San Antonio, Texas-based USAA Real Estate Co.'s investment with Dallas-based Centennial Real Estate on a $300 million redevelopment of MainPlace Mall in Santa Ana, California, at the busy southeast corner of Interstate 5 and the Garden Grove Freeway, which is one of the strongest and densest trade areas in the country. The underutilized mall, which had declining business for years, will drop from 100% retail to 35% retail, with the balance a mix of office, apartments and a hotel.
And the nation's newest indoor mega mall, American Dream in northern New Jersey, will have about 55% non-retail space such as entertainment, and 45% retail. That mall is being watched across the country for how it performs after its scheduled opening this fall on whether it verifies the theory that malls need to be less than 50% retail in the era of online shopping, in which experiences are considered more effective than the traditional store visit in drawing foot traffic.
But there is still a future for malls that's single use. Unconventional players are also looking to lay claim to America’s indoor malls. Amazon, the e-commerce company that some say is responsible for the demise of shopping malls, has started buying former malls across the country to redevelop them into warehouses and fulfillment centers. The company has plans in the works for the former Rolling Acres Mall in Akron, Ohio, which at its peak had as many as 140 stores.
Shopping malls were built near large population centers that are precisely the same demographics that fulfillment centers target. But transforming a shopping mall into an industrial hub isn’t as easy as plug-and-play. Converting a retail space into an industrial space means facing permitting and zoning challenges, as well as steep costs of converting the structure into a warehouse, according to CBRE’s Trading Places: Retail Properties Converted to Industrial Use report, which it released earlier this year.
“This trend will continue to grow as the balance between brick-and-mortar retail and e-commerce shifts to necessitate more logistics space and less physical retail space,” the report states.
Still, not all indoor shopping malls are suffering in the age of e-commerce. Luxury offerings such as Houston’s Galleria Mall, Hudson Yards in New York City and Miami’s Dadeland Mall are strong performers in the retail sector, Boyar said. But those malls offer a commodity that not every shopping mall can offer: a mixture of traditional retailers and high-end, luxury offerings that cater to wealthy shoppers.
Even so, those malls are diversifying with experimental retailers. For example, Toys R Us, the iconic retailer that liquidated all its assets over the past year, chose Galleria Mall in Houston as one of two cities to open its revived concept called Tru Kids Brands, which will be interactive and feature new events and activities every day.
“Not all malls are doomed to extinction,” Boyar said. “The highest luxury malls in the wealthiest areas in the U.S. are still performing exceptionally well. If you have strong enough demographics and disposable income in that area, then the indoor malls are still viable.”
For the Record:
Boucher Design Group is the architect for the San Jacinto Marketplace, which is being built by LaGrone Services.
