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Law360 (August 28, 2020, 5:30 PM EDT )
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| Matthew Pisciotta |
Many malls were forced to close for months due to local shutdown orders, and where malls have been able to reopen, many have seen a significant decrease in foot traffic as shoppers are encouraged to practice social distancing and avoid large gatherings.
In the long term, fears regarding new outbreaks may make consumers reluctant to return to shopping in heavily trafficked areas. In addition, shoppers who traditionally have shopped at brick-and-mortar stores, especially older consumers, have now gained familiarity with the speed and convenience of online shopping and may continue to shop online even after the pandemic has passed. As a result, the reduced number of customers that many retailers are now experiencing will likely become a permanent trend.
The COVID-19 pandemic has already had a disastrous impact on large department stores, which have traditionally anchored shopping malls. In the past several months, J.C. Penney Co. Inc., Neiman Marcus Group and Pier 1 Imports Inc. have declared bankruptcy,[1] while Macy's Inc., Lord & Taylor LLC and Nordstrom Inc. have announced that they are closing locations across the country.[2]
Sears Holding Corp. previously filed for bankruptcy in 2018.[3] Other tenants, including The Gap Inc.,[4] The Cheesecake Factory Inc.,[5] and Dick's Sporting Goods Inc.[6] have announced that they will stop paying rent, and have negotiated rent abatements with landlords.
Market analysts have estimated that more than 50% of department stores anchoring malls will close permanently by the end of 2021.[7] As anchor tenants close, smaller retailers may exercise co-tenancy provisions in their leases, giving them the right to terminate their leases after anchor tenants have gone dark for a certain amount of time.
Not only has the COVID-19 pandemic damaged malls' revenue streams, but it has also undermined the prior attempts to reverse the decline in customer base caused by online shopping. Mall redevelopment trends had primarily focused on replicating the foot traffic that had traditionally been created by anchor tenants.
Prior to the COVID-19 pandemic, retailers had begun to reimagine the mall as a destination apart from its retail options, incorporating art exhibits, enhanced dining options and entertainment into retail spaces and mall common areas as a way to bring consumers into the mall. Mall owners had also experimented with filling vacant spaces with nonretail tenants, such as movie theaters, gyms and co-working companies such as Regus Corp. and WeWork Co. Inc., to bring people into the mall space.
However, it is unclear if any of these actions will continue to be viable post-COVID-19, as consumers may continue to avoid congregating in public places for the near future.
Prior to the COVID-19 pandemic, analysts had predicted that 1 in 4 malls would close by 2022.[8] It has become clear that due to the COVID-19 pandemic, this number is likely to be significantly higher. Already CBL & Associates Properties Inc., one of the largest mall owners in the country, has announced that it will declare bankruptcy by Oct. 1.[9]
As a result, mall owners have no choice but to look for new options to reinvigorate what was once a lucrative retail format. Two emerging redevelopment trends worth highlighting are the redevelopment of portions of existing malls for multifamily residential housing and the conversion of large retail spaces to e-commerce distribution centers. This article explores these trends, with an eye toward potential zoning issues associated with this type of redevelopment.
Multifamily Residential Housing
One option mall owners may pursue is the selective redevelopment of a portion of the mall property as multifamily residential housing. This helps replace the foot traffic usually created by an anchor tenant with on-site residents and brings the mall site closer to the mixed-use, walkable development concept that is currently in vogue.
One of the benefits of this strategy is that if the multifamily development is successful, the property owner has a greater opportunity to fill space within the property with other uses, such as hotels, restaurants and other entertainment options.
Multifamily housing has become a popular redevelopment strategy for retail outparcels that have gone dark. For instance, in 2019, Starwood Retail Partners LLC announced plans to demolish the 112,000-square-foot former Nordstrom store at The Mall in Wellington Green located in Wellington, Florida, and redevelop the west side of the mall with 700 multifamily units, a hotel, 22,000 square feet of restaurant space and a 3.5-acre crystal lagoon.[10]
In addition, mall owners may consider converting a portion of the existing parking facility into multifamily housing. The parking requirements in local zoning codes often require malls to have more parking on site than is practically necessary. As a result, while eliminating parking to add multifamily housing will likely require variances from local parking requirements, it is unlikely to negatively impact the site's function.
Interestingly, U.S. Department of Housing and Urban Development Secretary Ben Carson recently made public comments suggesting that vacant commercial space, which would include malls, could be converted to affordable housing.[11] Assuming federal government incentives such as tax credits are available, this could provide an alternate route for mall owners looking to redevelop their property as multifamily housing.
Mall owners electing to redevelop a portion of the property as multifamily housing, market-rate or affordable may face a variety of zoning issues associated with this reuse. Malls are generally located in commercial or retail zoning districts, which may not permit residential uses. In addition, malls are often subject to zoning overlay districts, which impose additional zoning requirements above those associated with the base zoning district.
Depending on the specific zoning in place, the mall property may have to be rezoned to eliminate any existing overlay district and/or to move the property into a different zoning district before it can be approved for residential use. This may require changes to the zoning code, official zoning map and/or comprehensive plan for the municipality in which the mall is located, which will require public hearings before the local government's elected officials and likely one or more local boards.
In addition, depending on how the mall property was initially developed, the property could be subject to a master development plan and/or other document approving an overall plan of development for the property, including specific uses. This development plan would have to be amended to account for the redevelopment of a portion of the property for residential use. Local governments would be wise to preemptively make changes to land-use regulations in anticipation of the adaptive reuse of malls, including changes to accommodate residential reuse.
Mall owners should also be aware of all the possible incentives from federal, state and local governments that may be available to them for redevelopment. For instance, many states have community redevelopment laws which allow a local development board to designate certain areas for redevelopment and to apply different incentives for developers working within the redevelopment zones. These incentives can include tax abatements and tax increment financing for infrastructure and other public improvements. Mall owners redeveloping their properties should determine whether their property is subject to the jurisdiction of the local redevelopment board.
Distribution Centers
Ironically, some mall owners have turned to e-commerce giants like Amazon.com Inc. in an attempt to keep their malls afloat. The Simon Property Group, the largest mall owner in the county, is reportedly working with Amazon on a deal in which Amazon would use spaces previously occupied by Sears and JCPenney as fulfillment centers, hubs where packages are shipped before being distributed for local delivery.[12]
Amazon has recently been aggressive in acquiring additional space for fulfillment centers, or last mile facilities to further cut down on delivery times and to expand expedited shipping to new areas. Fulfillment centers, which do not attract customers, would do little to buoy the other retail uses in the mall but would relieve pressure on mall owners by filling large retail spaces.
From a zoning perspective, converting vacant commercial space to fulfillment center use has some of the same challenges as a conversion to multi-family residential housing. Fulfillment centers are often classified as an industrial or light industrial use, meaning that, to the extent that the mall property is zoned commercial, a rezoning and potentially a comprehensive plan amendment would be necessary. If the mall property was developed in accordance with a master development plan that identified specific uses, that master development plan would likely have to be amended.
Approval of the rezoning, master development plan amendment, and any required site plan approval would all require approvals from the local government's planning board and likely elected officials after public hearings. Mall owners may find that elected officials are conflicted on whether to support the redevelopment of malls as fulfillment centers. On one hand, a successful mall is a community attraction and often a point of civic pride. As such, attempts to replace portions of the community mall with what is essentially a featureless warehouse may be met with resistance.
On the other hand, a vacant mall is an eyesore and drain on property values and tax base for the entire community. As such, appointed and elected officials may be inclined to support any new use that will keep the mall operating. The impacts of fulfillment centers are also relatively low in that they do not strain community utilities (i.e. schools, water, sewer, etc.) and create less roadway and public transportation trips than retail uses.
That said, fulfillment centers operate 24/7 and generate large truck traffic, which may be problematic depending on whether the mall is in close proximity to residential areas. There is also an argument to be made that fulfillment centers are an important part of the response to COVID-19 by allowing consumers to safety and quickly ship products to their home, and thus maintain social distancing guidelines.
The COVID-19 pandemic has served as a catalyst that has accelerated the decline of malls to the point where the future of many malls is in doubt. As such, mall owners should thoroughly investigate the options available to them to redevelop, whether by adding a residential component, selling portions of the property to be used as fulfillment centers, or both. It remains to be seen whether these trends will be able to reinvigorate declining malls or if future redevelopment plans will move away from the mall concept entirely in favor of a complete adaptive reuse of existing malls.
Matthew Pisciotta is of counsel at Nelson Mullins Riley & Scarborough LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Pandise, Emily. "Which big names have filed for bankruptcy since the coronavirus pandemic hit? Here's the list." NBC News, May 15, 2020, https://www.nbcnews.com/business/consumer/which-major-retail-companies-have-filed-bankruptcy-coronavirus-pandemic-hit-n1207866. Accessed August 26, 2020.
[2] Loeb, Walter. "More Than 13,800 Stores Are Closing In 2020 So Far—A Number That Will Surely Rise." Forbes, July 6, 2020, https://www.forbes.com/sites/walterloeb/2020/07/06/9274-stores-are-closing-in-2020--its-the-pandemic-and-high-debt--more-will-close/#648d1449729f. Accessed August 26, 2020.
[3] Isidore, Chris. "Sears, the store that changed America, declares bankruptcy." CNN Business, October 15, 2018, https://www.cnn.com/2018/10/15/business/sears-bankruptcy/index.html. Accessed August 26, 2020.
[4] Thomas, Lauren. "Gap stops paying rents, warns it might not have enough cash for operations." CNBC, April 23, 2020, https://www.cnbc.com/2020/04/23/gap-warns-it-might-not-have-enough-cash-for-operations-as-it-stops-paying-rent.html. Accessed August 26, 2020.
[5] Kang, Matthew. "The Cheesecake Factory Tells Landlords Across the Country It Won't Be Able to Pay Rent on April 1." Eater, March 25, 2020, https://la.eater.com/2020/3/25/21194144/cheesecake-factory-rent-strike-chain-restaurant. Access August 26, 2020.
[6] Fung, Esther. "Landlords, Companies Clash Over Rent Payments During Coronavirus." The Wall Street Journal.
[7] Thomas, Lauren. "Over 50% of department stores in malls predicted to close by 2021, real estate services firm says." CNBC, April 29, 2020, https://www.cnbc.com/2020/04/29/50percent-of-all-these-malls-forecast-to-close-by-2021-green-street-advisors-says.html. Accessed August 26, 2020.
[8] Calfas, Jennifer. "1 in 4 Malls Will Be Closed by 2022, Firm Says." Money, June 1, 2017, https://money.com/malls-closing-2022-credit-suisse/#:~:text=The%20retail%20apocalypse%20is%20real,note%20said%2C%20according%20to%20Fortune.#:~:text=The%20retail%20apocalypse%20is%20real,note%20said%2C%20according%20to%20Fortune. Accessed August 26, 2020.
[9] Thomas, Lauren. "U.S. mall owner CBL strikes restructuring deal with lenders to slash debt." CNBC, August 19, 2020, https://www.cnbc.com/2020/08/19/us-mall-owner-cbl-strikes-deal-with-lenders-avoiding-bankruptcy.html. Accessed August 26, 2020.
[10] Rhodes, Wendy and Kristina Webb. "EXCLUSIVE: Massive Crystal Lagoon centerpiece of Wellington mall's proposed new concept." Palm Beach Post, October 1, 2019, https://www.palmbeachpost.com/news/20191001/exclusive-massive-crystal-lagoon-centerpiece-of-wellington-mallrsquos-proposed-new-concept. Accessed August 26, 2020.
[11] Wingrove, Josh. "White House Pushing to Convert Empty Commercial Space to Housing." Bloomberg, June 24, 2020, https://www.bloomberg.com/news/articles/2020-06-24/white-house-pushing-to-convert-empty-commercial-space-to-housing?sref=mHw3n8zP. Accessed August 26, 2020.
[12] Holmes, Aaron. "Amazon reportedly wants to take over JCPenney and Sears stores to turn malls into giant fulfillment centers." Business Insider, August 9, 2020, https://www.businessinsider.com/amazon-looks-to-turn-malls-into-giant-fulfillment-centers-report-2020-8#:~:text=Amazon%20reportedly%20wants%20to%20take,malls%20into%20giant%20fulfillment%20centers&text=Amazon%20is%20in%20talks%20with,Street%20Journal%20reported%20on%20Sunday. Accessed August 26, 2020.
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