The Dying Mall’s New Lease on Life: Apartments

 It’s definitely, finally, without a doubt, the end of malls, right? 

The multiple crises impacting the U.S. economy — the botched response to the coronavirus and the resulting economic fallout, and lack of spending power — have delivered a new gut punch to brick-and-mortar retail, a sector that was already reeling. More than half of all U.S. department stores in malls will be gone by 2021, one real estate research firm predicts, and surviving retailers may not be far behind; once-mighty brands such as Cheesecake Factory and the Gap are skipping rent payments, Starbucks is closing physical locations, and developers see a future for big box stores as office complexes. Banks fear “a stampede” of landlords looking to restructure loans after commercial tenants miss their rents. Last week, the Trump administration floated the idea of turning the glut of empty retail space into affordable housing. 

At the Alderwood Mall in Lynnwood, a suburb north of Seattle, an adaptive reuse project already in progress suggests that America’s vast stock of fading shopping infrastructure could indeed get a second life as places to live. Such transformation could even bring malls closer to the “village square” concept they were initially envisioned to become. 

Developers are turning a wide swath of the 41-year-old shopping center into Avalon Alderwood Place, a 300-unit apartment complex with underground parking. The project won’t completely erase the shopping side of the development: Commercial tenants will still take up 90,000 square feet of retail. But when the new Alderwood reopens, which developers expect will happen by 2022, the focus will have shifted dramatically. One of the mall’s anchor department stores, Sears, shut down last year; in a sense, the apartment complex will be the new anchor. 

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"This project is a great example of evolution in the shopping center industry,” says a spokesperson for Brookfield Properties, which owns the property and is collaborating with AvalonBay Communities, Inc. on the residential component. (Brookfield declined to offer a cost estimate for the project.) “Today, people prefer to live in smaller spaces and want walkable developments rather than relying on vehicular transit. This project caters to these needs.”

The Lynnwood project exemplifies how the Covid-19 pandemic isn’t as much changing real estate as accelerating existing trends. Randy White, CEO of White Hutchinson Leisure & Learning Group, a consulting firm focused on location-based entertainment, says the Alderwood project is smart, because it’s envisioning a world where we can digitally shop and entertain ourselves at home. “Right before the pandemic, a lot of these malls thought restaurants and entertainment would be their savior, the new anchors,” he says. “Those hopes are dashed. There’s even a question if movie theaters are going to survive.”

Lynnwood may offer an ideal testing ground for the long-term opportunities in large-scale suburban mall-to-housing conversion. The suburb of roughly 40,000 people is a commuter bedroom community for Seattle, which has been struggling mightily with a severe housing shortage. The mall had plenty of vacant real estate needed for new homes. And a planned expansion of light rail from Seattle to Lynnwood in 2024, part of the region’s Sound Transit Extension Phase 2, will make market-rate apartments even more attractive for residents who commute to jobs downtown or at the Boeing or Microsoft campuses. 

“There have been some great examples of this kind of redevelopment, such as Tyson’s Corner in Virginia, but it’s very specific to individual cases, and very expensive,” says Nick Egelanian, president of retail consultancy SiteWorks, who predicts up to a third of malls will be vacant due to the economic fallout from the pandemic. “If it’s a good location, you can backfill that with residential, hotel, office and entertainment.” 

Lynnwood has always seen the mall as a regional growth center, says David Kleitsch, the city’s economic development director. Ever since the end of the Great Recession, the city has planned for residential growth around the shopping center, including upzoning to encourage more dense housing, pushing for Sound Transit extensions, and investing in streetscapes and connectivity. “We see this as a catalyst for future growth, and housing will be a big part of that,” says Kleitsch. 

Brian Lake, a senior attorney at the Pacific Legal Foundation who focuses on housing issues, believes that, minus the hurdles put up by zoning regulations and red tape, such commercial conversions should be happening everywhere. From a construction standpoint, conversions are simple. “We need to open up every opportunity possible to develop new affordable housing,” he says. “Fannie Mae estimated we need an additional 2.5 million units just to satisfy the long-term demand, and that’s before this year’s crises.”

Mall owners and operators, such as Brookfield and Simon Property Group, have had a brutal 2020: Shifts in consumer behavior have been gnawing away at the classic enclosed suburban mall format for many years; then the pandemic completely upended in-person shopping. Mark Hunter, managing director of retail asset services at CBRE, says operators suddenly had to shut down, then coordinate with numerous government agencies on how to reopen with stringent new sanitation and safety protocols, not to mention overcome challenges with furloughed staffers and out-of-season inventory. 

Even as fresh Covid-19 outbreaks race across the suburbs, in June Brookfield managed to reopen every single one of its nearly 170 locations in 43 states. But “normal” is a distant memory amidst a massive wholesale shift in commercial real estate. Consider the recent fate of two much-touted new flagship shopping developments of the last year: The American Dream Mall in New Jersey now hosts a Covid-19 testing facility, and struggling Manhattan mega-development Hudson Yards lost its big anchor, Neiman-Marcus. 

“Before the Great Recession we had too many retail spaces; now we have way too many retail spaces,” says White. “It may be we’ll only be left with the A malls. Before the pandemic, I thought the B-plus malls would survive. The outdoor lifestyle centers will survive — they’re perceived as safer than indoors. But it’s hard to escape the fact that we’ve trained people to fear the world, and that it’s going to have long-term impacts on their behaviors.”

Converting commercial real estate to housing may be the best use of land in such an over-retailed country. Big shopping centers tend to be centrally located and connected to transit. Hunter sees excess retail space at malls becoming more adaptive, and filling uses that aren’t hospitality focused, such as residential, or even flex or warehouse space. During a time of housing shortages, Lake believes that transforming empty commercial buildings is a “moral imperative.” 

The Alderwood redevelopment brings challenges that Kleitsch and other local officials are trying to get out ahead of as construction, which restarted in mid-May, continues. Lynnwood is a middle- to low-income suburb, with lots of service workers, so the city is working on a housing action plan to make sure social services and education arrive in the community, not just new apartments. The mall may be evolving, but the desire, and challenges, in creating a community-oriented development still remain. 

“You can have acres and acres of housing, but without a community, is it a place?” Kleitch says. “Does it fulfill somebody’s experience? We want to be more than that.”

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