The Fate of Enclosed Shopping Malls in Tertiary Locations

Throughout the United States

The advent of the Internet has brought about a change in shopping patterns throughout the United
States. In addition, another precipitating factor in the change in shopping patterns has been a recent
large run-up in gasoline prices which make consumers think twice about driving 30 miles to shop for an
item they can purchase on-line.

Furthermore, the demographics of the United States are changing as the baby boom generation ages
and is replaced by the “Millennials” as the primary target for retailers. It appears that Millennials (those
born in the late 1970’s till the end of the 20th century) prefer lifestyle centers, where they can take in a
movie and eat as well as shop, as opposed to strictly shopping in enclosed shopping malls. Additionally
the “other” major demographic, Baby Boomers, also prefer the lifestyle center concept. These
demographics are the target audience for retailers and modern society is rendering the enclosed
shopping malls obsolete and not able to compete with newer retail concepts.

Is there life for enclosed shopping malls in tertiary areas of the United States?

These properties are generally located in close proximity to interstate highways and were built under
the premise that Americans love to drive and shop. With changing demographics, these centers will
have to adapt to lifestyle changes. What enclosed shopping malls have in their favor are that they
generally have a superior location in a particular town and/or county and have often been a destination
location for people in a particular region for the past thirty to fifty years or so.

Major components in favor of the re-tooling of the enclosed shopping malls are

 The Baby Boomer generation is aging, becoming less mobile and are familiar with and
often nostalgic about malls;
 Generation X’ers and Millennials are searching for people-oriented experiences to
complement their often solitary experiences on-line
 People, for the most part, like to congregate with other people and feel less alienated
when they are socially interacting.

How can an enclosed shopping mall answer the needs of the general U.S. population?

First, housing components can be added to shopping malls to accommodate aging Boomers who need
to be closer to day to day amenities like food shopping, restaurants, entertainment venues, physical
therapy centers, health spas, continuing education programs and dry cleaners. These are services that
are, for the most part, not associated with enclosed shopping malls.

The first step in re-assessing a particular enclosed shopping mall is to examine the existing housing
needs of a particular community ( e.g., is their existing housing stock primarily owned or rental product,
is it upscale, middle income or downscale?). The Shopping mall can provide a new housing experience
for both young and old consumers depending upon how the units are configured. In general, the plus of
many enclosed shopping malls are that they are centrally located and have large tracts of land that can
be re-developed into true “Town Centers” that contribute to a sense of community in a particular town
and/or county.

What are many suburbs in the United States lacking?

Sociologically, much of America has become alienated with its lack of true community; its youth “hang
out” in shopping malls, convenience stores, and strip centers without aim or purpose. In some ways,
the enclosed shopping mall contributed to this alienation and it may well be the answer to this
pernicious problem.

Communities need a binding and a feeling of togetherness that people can bring to each other. The
shopping mall often brought people together in pursuit of a common American interest: shopping.

There are now other areas that the same Mall can provide to people: Entertainment, in the form of
movies and other art forms such as Art, Theater and Music. The re-configured Mall can also potentially
provide Education in the form of continuing education programs for seniors and under-skilled adults (as
well as people interested in just continuing their education). Educational services can be provided by an
existing college or university nearby that establishes an off-site facility at the local Mall.

The enclosed shopping mall mixed use re-development could be a viable solution to the need for well
constructed housing to service an aging population. This type of housing would be targeted to people
that simply want to live near other people and not isolated in either rural settings or overcrowded in
highly urban situations,

What would a typical shopping mall re-development entail?

The most important non-retail component of the mixed use development is housing.

As mentioned above, the demographics of a particular community, including any population growth or
decline projections, as well as the existing housing stock has to be examined to determine the optimal
housing needs. Even if a community’s population is declining, an enclosed shopping mall location can
still be quite viable if properly re-developed.

A second determining factor in creating a Town Square or Center is the need for the right kind of food
market to service the new housing stock. In certain upscale locations, an organic supermarket might be
preferred, while in a more middle income demographic a somewhat more traditional supermarket
would be more appropriate. For this reason, it is very important to accurately assess the current and
future demographics of a particular community.
A third potentially important factor might be the inclusion of a hospitality component. Many existing
shopping malls already incorporate a certain amount of hotel development either onsite or nearby. The
business and/or tourism activity associated with a particular community, as well as the construction of
new housing units that might not have sufficient space to hold visiting relatives might mandate the need
for additional hotel rooms in a particular area.

Shopping malls should be in relative close proximity to at least one of three situational phenomena: 1)
Universities or Colleges, 2) Military Installations and/or 3) Gambling Facilities. These situations are built-
in traffic generators that help support a large scale shopping mall development. Taken one step further,
the changing demographics in the U.S. mandate a greater concentration of restaurants, entertainment
venues, community centers, health care facilities, office facilities, public service facilities like post
offices, government and educational properties and other non-traditional services not necessarily
associated with enclosed shopping malls.

The Current Opportunity:

Enclosed shopping malls are often considered “White Elephants” by both consumers and real estate
investors, alike. Unlike many developments, municipalities have a vested interested in seeing such
properties succeed as they often occupy dominant locations in a particular community. They also have
extraordinary income potential for municipalities and are often one of the few income generators for a
particular community. Therefore, communities and municipalities will often “bend over backwards” to
offer Tax Increment Financing (TIF) in the form of sales tax exemptions for a relatively long period of
time and other incentives to shopping mall developers like easy variances and other pro-development
postures, unlike many other development situations. In the instance of shopping malls, the community,
the government and the development have aligned interests as the property already assumes a
dominant presence in a particular community and may be in various stages of decline already.

The price of tertiary enclosed shopping malls is quite depressed given the current credit crisis, with in-
place yields with current occupancy often in excess of 8% and in certain instances well in excess of 10%.
In addition, there may be either shop space or anchor vacancy that creates additional value added
opportunities. In addition, there may be developable land associated with a particular development
that may be appropriate for either residential, hotel or office development (in certain instances even
industrial development may be appropriate).

Current Lack of Liquidity and Financing:

Some investors and Financial Institutions are reluctant to invest in enclosed shopping malls due to
relatively small populations and low per capita incomes. However, many communities may still be quite
stable and viable and provide investors/lenders with extraordinary opportunity.

There may be a new interest in non-luxury property developments that reflect changing economic
situations that favor more “bread and butter” investments that are less susceptible to the vicissitudes of
the current credit crisis. Therefore, Enclosed Shopping Malls may be viewed as a “Contrarian Play” that
offer attractive current yields and a price well below current replacement cost in today’s real estate
investment environment.

Ability to Achieve Superior Investment Returns in Today’s Real Estate Investment Climate:

Many enclosed shopping malls require additional investment capital to remain viable in today’s
competitive retail investment environment. For the reasons mentioned above, enclosed shopping malls
have continuing viability as locations of choice and often merely need a tweaking of retail tenant mix.
These may include removal of more traditional retail anchors like K-Mart, Macy’s or Belk’s in favor of
less traditional junior anchors that address the need for additional entertainment uses and even
residential components.

Conclusion:

We predict that there will be a considerable investment opportunity in the re-development of existing
enclosed shopping malls in tertiary locations in the U.S. These properties may be considered obsolete
by many investors and lenders today, but due to their attractive dollar per square pricing, may be
propitious for mixed use development to adapt to the changing demographics of many of America’s
communities.

Savvy investors and lenders should be cognizant of this opportunity and be receptive to creative real
estate developers that understand the changing demographics of the American population. These
investors and lenders should be willing to address the needs associates with these changing
demographics and attitudinal shifts.

1. The job of the “redeveloper” Is to bring traffic to the property. “If they come”, they WILL spend.
2. Malls that only provide shopping will further fail
3. As fuel prices have increased and show no sign of returning to previous levels the trips to the
mall must become an experience, which lasts longer than an hour.
4. Coordinate public transportation to the property.
5. Provide community facilities for religious organizations, sporting events, concert/assembly,
conference facilities, fast food, casual dining, and event catering.
6. Libraries.
7. Education.
8. Childcare.
9. Any form appropriate for public gatherings, political events, clubs and associations.
10. Emergency evacuation facility.
11. Healthcare related services.

Eric Kaufman & David Kopp -- Symphony Property Group www.symphonypropertygroup.com

June 2008