The “new” reality


In 1995, there were approximately 1,800 regional malls in the US. At that time, ICSC (the International Council of Shopping Centers) published articles and held sessions at conferences addressing the then-current predictions that 25% of those regional malls would close, and there was a need to find alternative uses for regional malls. A few years earlier, at either the ICSC Spring Convention (now ReCon) or the Fall Management and Marketing Conference, one of the speakers (I believe it was Dr. Peter Linneman) made the statement that the regional mall development business (and to a certain extent even the open air shopping center development business) was a one generation business – the generation of Herb and Mel Simon, Ernest Hahn, Eddie DeBartolo Sr., the Bucksbaums, Henry Faison, Leo Eisenberg, Mal Riley, Norm Kranzdorf and so many others who made their names and fortunes (and sometimes lost and made them again).

That was 23 years ago, and there was already discussion of alternative uses for regional malls and vacant department stores. Last week, I read a story that another traditional regional mall would never be built in the US. “Never” is a mighty long time. But, as those 23 year old stories prove, this is not “breaking news.” The industry has been expecting this, and has been preparing for this, for over 20 years (it may actually be pushing 30 years as articles about “de-malling” and converting department stores to data center and other uses started appearing in the late 1980s).

Today, depending upon how you classify them, we have somewhere between 1,200 and 1,300 regional malls. Just about 25% of those 1995-era 1,800 malls no longer with us in their original form. And, today, the experts predict that 25% of today’s population of regional malls will no longer exist over the next 10+ years. But, really, while some will go away completely, most will continue to exist, just in an evolved format.

The ICSC and the leaders in this industry have had their eyes wide open for years. Leasing, asset management, development and the other disciplines have been adapting their long term plans, changing lease language, anticipating and planning for what the future will bring. It is because they are the ones bringing the future. The mall and open air shopping center development business may have been a one generation business, but that next generation of David Simons and Stephen Lebovitzes and their contemporaries are finding and creating even more value in the evolution of regional malls and open air centers.

Maintaining and enhancing value has always been what our industry is about. It may look a little bit different, but that is the future of the industry too!

Squeeze another 353 sf out of that space!

This past week, we had a call with a long term client to review the results of a lease audit. Typically, it is the accounting people, perhaps some accounts receivable people and occasionally asset management. We review additional historical billings and expected increases to cash flow. But, this week was a little different, it was a group that, in addition to property and asset management, also included leasing. It was outstanding to be able to get all of the disciplines on the same page.

The following day, it really hit me just how valuable that approach was to an owner of shopping centers.

As you know, cotenancy is becoming more and more of a hot topic as the industry evolves. We regularly perform analyses to determine the immediate and long term impact of changes to the anchor and tenant mixes in a center – what is the one year financial impact, what percentage of square footage will have a right to terminate, do the leases also require a sales drop for cotenancy to kick in, can we replace a department store with a hotel? A theater? A restaurant/video/bowling combination? A health club?

On one of the properties we were analyzing this week, the landlord was able to bring in a health club to take some vacant inline space – just under 19,650 sf. It is actually a great addition to the center. But, unlike the first client that pulled all disciplines together, this one did not have the same level of communication. Therefore, when the deal was approved, no one considered that an additional 353 sf would have gotten that particular premises over the “major” definition for a number of tenants at the property. 20,000 sf was the magic number that would have made the health club count as an additional major – that would have provided an additional level of insurance against a cotenancy condition kicking in for a group of tenants that also happened to include two tenants that also fell in to the “major” category themselves.

That additional 353 sf would have … provided an additional level of insurance against a cotenancy condition kicking in …

The cotenancy condition at the property is currently not an issue. However, a meeting of minds across disciplines within the organization would have allowed someone to say “too bad it’s not 20,000 sf,” and another person to say “well, could we add 353 sf to the lease and just not charge them for it?”

As our industry evolves, it is more critical than ever to involve all disciplines within an organization to ensure that all aspects of a deal are considered.

Time for an interdepartmental group hug!