How to do a $100 million makeover without paying $100 million

December 16, 2019

SCT, By: Steve McLinden

Much like a home renovation, a mall remake often takes longer than initially anticipated and can end up costing more. It also involves such factors as new infrastructure and utility extensions, building-code updates, and the need for temporary relocation of at least some of the tenants, among other headaches.

Then, too, early traditional retail centers were built for shopping — and with no expectation of the addition of the cinemas, food halls, hotels, offices, living units and community-engagement spaces that factor into mall renovations today. Even minor rehabs can run well into the millions, but it is the rare mall indeed that has the wherewithal to perform such top-to-bottom renovations and expansions as Unibail-Rodamco-Westfield’s $1 billion reworking of the trilevel Westfield Century City, in Los Angeles. In connection with ICSC’s CenterBuild Conference (held Dec. 3–6 at the Arizona Biltmore, in Phoenix), SCT looks at some of the latest “more affordable” renovations, which we define as those for $45 million or less for the smaller centers and no more than $100 million for the larger ones.

Small budgets, big impacts

PREIT’s hugely successful, $30 million renovation and retenanting of The Mall at Prince Georges in Hyattsville, Md., which the firm calls its best-performing redevelopment ever, has increased mall sales by about 23 percent, to $557 per square foot, against prerenovation days, PREIT said in September. The project features a new stand-alone building; some newly tenanted, outward-facing restaurant spaces; and several cosmetic improvements. The redo helped attract national retailers that have filled previous voids in that market, including DSW, Five Below, H&M and Ulta Beauty. “Curating diverse offerings across multiple categories is key to success as this business evolves,” said PREIT Chairman and CEO Joseph F. Coradino.

Magic Valley Mall, in Twin Falls, Idaho, has been able to conjure up some interior-renovation magic for a mere $3 million, in a phased redo that is nearing completion. “We focused not on structural or architectural elements, because that’s where you really start spending moneyfast,” said Brent White, CSM, regional general manager with mall owner Woodbury Corp. “Instead, we said, ‘Let’s spend money on flooring, contemporary lighting, furnishings and common areas.’ ”

Besides opening up new exterior pad sites, the center created three indoor parks, including one offering many of the large components of outdoor playgrounds, another that features such games as ping-pong and 3-D chess (plus some giant TVs for sports), and one that is essentially a reinvigorated food court. The 525,000-square-foot center also added Italian marble flooring and custom-made furnishings throughout. “The public loves finding all these design elements in a small community center,” White said. “We don’t have to deliver a water park or other huge entertainment experience, but we can deliver a greater experience.” Prospective tenants obviously liked what they saw: Hobby Lobby replaced a closed Macy’s, and Kohl’s is under construction in an old Sears. Among other new arrivals are Olive Garden and a Buckle Youth store, the first of its kind in the U.S. The remodeling “has very positively impacted our leasing and laid a foundation for the future,” said White.

In Sebring, Fla., Lakeshore Mall owner B.V. Belk Jr. has spent about $500,000 annually since 2014 on modernizing the 500,000-square-foot facility. Belk replaced the roof with thermoplastic polyolefin roofing, bought 16 new air-conditioning units, installed LED lights, remodeled the bathrooms with granite countertops, and made many other cosmetic and practical improvements, including some fresh paint. This roughly $2.5 million renovation (thus far) complements a separate, $3 million remodeling of the center’s AMC Lakeshore cinema. Belk told the local press last year that the mall is profitable and has signed five-year leases with Belk, Bealls and JCPenney, plus a 10-year lease with AMC.

CBL Properties’ Asheville Mall, in Asheville, N.C., has plans for five new retail buildings, a movie theater and a six-story apartment building in the $45 million redevelopment of a former Sears space. This 341,000-square-foot mixed-use project, by Seritage Growth Properties, owner of many former Sears properties, preserves an existing automotive center structure on the property.
The open-air Paseo Nuevo, in Santa Barbara, Calif., is investing about $20 million renovating some 156,000 square feet of that 460,000-square-foot space, part of a revised lease agreement with the city that runs through 2065. The center expects to spend $14 million in capital improvements and $6 million in tenant improvements. The plans include gathering spaces, dining-area improvements, art installations, a fire pit, a bocce court, benches, signs, new landscaping, modern lighting and a new access way from the inner center to the street-front retail and restaurants on Chapala Street. As part of the deal, Paseo Nuevo will make a $200,000 donation to the city for services to the homeless. The center was constructed in 1989 in a private-public partnership.

In Pasadena, Texas, John Quinlan, the new owner of the struggling Macroplaza Mall, announced that he will put about $20 million into transforming the space. The center is to grow from about 50 businesses to several hundred by the time the five-year, multiphase renovation is completed, says Quinlan. These improvements, he says, will help the mall “become the center of Pasadena once again.”

Large centers: Adding value without breaking the bank

Last year the 300-store Woodfield Mall, in Schaumburg, Ill., the state’s largest, completed a $13.9 million upgrade the developers dubbed a “style evolution” and which included an 820-seat dining pavilion with floor-to-ceiling glass windows. Owner Simon also replaced many of Woodfield’s brick features and added a pair of escalators and one new elevator, besides updating two existing elevators, while revamping seating areas throughout the nearly 50-year-old, 2.2 million-square-foot center. The redo has improved traffic flow, making what had been a confusing layout much more efficient, center officials say. Larger event spaces and some new tile and carpeting were part of the program.

Smaller, piecemeal renovations can have a big effect too, as seen in the remake of the iconic Station Building at the Easton Town Center mixed-use complex, in Columbus, Ohio. The price tag: $13 million. Retail spaces were turned inside out, with storefronts moved to the outside. “This helped increase foot traffic and visibility for retailers, plus it created a more efficient event and activation space inside the building,” said Easton CEO Jennifer Peterson.

The developer expanded the building’s signature grand staircase with 1,370 feet of color-changing lights and added other energy-efficient lighting as well. About 80,000 square feet of flooring got replaced, and four new tenant spaces were added. The renovation, done in partnership with Ohio-based M+A Architects, “takes the building into the future while remaining true to its original design,” Peterson said.

A $13 million renovation transformed the Station Building at Easton Town Center, in Columbus, Ohio

In a more comprehensive renovation, Minnesota’s 1.2 million-square-foot Rosedale Center will get a $100 expansion and renovation that is to include additional retail and restaurants, housing, a hotel, a grocery store, some fitness centers, some co-working space and a medical building. This phased expansion is the biggest ever for the center, which draws about 14 million visitors yearly. Recent challenges include the closings of the food hall and Herberger’s. On the plus side, a two-story, 23,000-square-foot SeaQuest aquarium has opened.

Vestar is close to completing a $100 million, multiphase renovation of The Gateway, in downtown Salt Lake City. The 1.4 million-square-foot, open-air center went into a tailspin after the $1 billion City Creek Center opened a few blocks away in 2011. Vestar added some new turf and gathering spaces, plus sidewalks, murals and playground equipment, as well as making improvements to the parking facilities. Among the new features are a museum, some restaurants and lounges, a fine-foods store, a home-decor store and a SkinnyFats Food & Beer Hall. Those elements join entertainment tenants Dave & Buster’s, Megaplex and the Wasatch Theatre Company. Construction will start next year on the eight-story, 225-room Union Pacific Hotel. The center had practically become a ghost town before Vestar bought it in 2016, according to Jenny Cushing, the company’s vice president of leasing. Vestar converted a traditional downtown shopping center “into a vibrant community hub and entertainment destination with a distinct personality,” featuring luxury restaurants, some office space and outdoor art, says Cushing.

Renovation realities

The question is, what can the property owner do to unlock value in the real estate?” said Jerry Hoffman, founder of Lincoln, Neb.–based real estate advisory firm Hoffman Strategy Group. Most renovations are geared to attracting more families to centers “with the thought being that this foot traffic will produce cross-shopping,” Hoffman said. But typically, most such users “don’t generate the foot traffic once produced by the major department-store anchor,” he observes, although they do activate vacant spaces and help stabilize occupancy.

Shopping center redevelopment opportunities will remain strong, focusing primarily on conversions “that add housing, office and hospitality elements, pivoting away from stand-alone destinations,” says one Cushman & Wakefield report. This phenomenon seems to be the continuation of a decadelong trend. A 2017 JLL report says U.S. malls invested about $8 billion in capital improvements from 2014 through 2016, with roughly 40 percent of them adding on restaurants, and some 20 percent removing the word mall from their names — opting instead for the likes of shoppes or village.

“What can the property owner do to unlock the value in the real estate?”

Often triggering small interior renovations are newly signed box replacements. A few such, Hoffman notes, are Aldi, Amapola Deli & Market, Autobahn Indoor Speedway, Crayola Experience, Gold’s Gym, Jump ’n Jammin, KidZania, Lazy Dog Restaurant & Bar and Round 1. The costs of renovating such spaces, vacated by the likes of Barnes & Noble, J.C. Penney or Sears, generally are something less than $30 million, he says. Some renovations happen when influential retailers need to revamp or downsize, which sometimes leads to upgrades of the spaces nearby, retail consultants say, and others occur when a landlord reconfigures a center to maximize frontage or to sell access to pad sites.

Adversely affecting renovations just now is an element of the 2017 Tax Cuts and Jobs Act mandating that interior renovations and tenant improvements be depreciated over 39 years instead of the previous 15, notes Phillips Hinch, ICSC’s vice president of tax policy. “That raises the after-tax cost of such improvements,” he said. ICSC has been working for a bipartisan legislative fix.

The supply of big-box tenants is hardly endless, cautions Nick Egelanian, president of Annapolis, Md.–based SiteWorks Retail Real Estate Services. “While there’s a lot of talk about entertainment, movies, food halls and the like, the number of deals out there is very small for the Dave & Buster’s and the occasional KidZania and Crayola Experience,” he said. Moreover, most owners of ‘B’ and ‘C’ properties have had limited options since the recession, owing to capital constraints, Egelanian says. Many malls unable to refinance have gone into special servicing, forcing a sale “at pricing down to land value,” he said. “The restructuring of how we shop has been ongoing for the past 30 to 40 years,” Egelanian said. “The markets are dealing with it efficiently — they’re redeveloping and repurposing piecemeal, and the centers that should be getting capital are getting it.

 

Reproduced by permission of SCT, a publication of ICSC