Multifamily increasingly tops the list of alternative uses that can drive traffic and sales to properties, increase density and revitalize vacant anchors or surplus parking.

Adding mixed-use components to mall properties is by no means a new phenomenon. It first gained attention more than a decade ago, following the shakeout in big-box stores during the 2008-09 recession. However, activity has ramped up over the past few years, along with additional big-box and department store closings, notes JLL Retail president and CEO Greg Maloney. Bon-Ton, Sears, JCPenney, Macy’s and others have closed hundreds of mall stores. Sears, in particular, has shed about 160 over the past 18 months and has only about 30 remaining.

“It is not until recently where we really had the opportunity to get control of some pretty good real estate and pursue this strategy of adding multifamily to what in a lot of cases are town centers,” said Brookfield Properties vice president of development Jim Varsamis. In particular, Brookfield gained control of a number of Sears stores over the past few years, and the first few of those redevelopment projects are nearing completion.

Brookfield has partnered with AvalonBay Communities in building two residential towers at its 1.1 million-square-foot Alderwood in suburban Seattle. The former Sears is converting into a mixed-use development that will feature 328 apartment units and lower-level retail that faces a new outdoor plaza. The plaza also will connect to the mall via a new mall entrance. “What was a less-trafficked area of the mall will start to get a new center of gravity towards it with more vibrancy from people in the plaza that can interact with the food and drink offerings there,” Varsamis said.

The first residential units will be ready for occupancy in the fourth quarter, and completion is set for spring 2022. “That is an example of a top-tier asset where we had the opportunity to add multifamily and enhance the overall center,” said Varsamis. Alderwood is anchored by a Nordstrom, Macy’s and JCPenney.

Solutions for distressed assets

Redeveloping vacant anchor stores or developing excess land along a property’s perimeter can play an important role in revitalizing struggling retail and lifestyle centers. “We believe in the future of brick-and-mortar retail, but we recognize that the model must be adaptable,” said Mason Asset Management managing principal Igal Nassim. "We aren’t only looking at retail when it comes to our vacant anchor spaces because we believe our properties will be the most successful when they are vibrantly diverse in their offerings. To accomplish this kind of redevelopment successfully, you have to be willing to really study and understand the community and its market landscape.”

Mason Asset Management and operating partner Namdar successfully negotiated the addition of a 312-unit apartment complex at Gulf View Square in Port Richey, Florida. The two firms provide real estate leasing, management and operations for about 60 enclosed malls and have an ownership stake in the 760,000-square-foot Gulf View Square. The Gables at Gulf View, which opened in September, was built on a site formerly occupied by JCPenney and Macy’s.

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“We’ve seen a significant increase in foot traffic and sales at the mall over the past three to four months, which indicates that this redevelopment solution has been effective in revitalizing the area and could be applied successfully elsewhere,” added Nassim. In this case, mall owners worked with local apartment developer Dorvidor Management Co., which owns a 420-unit apartment property directly across from the mall and was interested in expanding its presence in the market.

Nassim sees more opportunities to add apartments to help position retail properties as lifestyle destinations. “On the redevelopment front, we’ve always looked at multifamily as an option when we assess the needs of the market to determine the highest and best use for our properties in terms of what will best benefit the surrounding neighborhood and reinvigorate the local community that the mall calls home. However, as the pandemic drives many people to relocate from large city centers to more suburban areas, we’re seeing a much greater demand for multifamily housing in that mix than we did a year ago.” The addition of a residential component also is piquing interest and gaining support at the city level, in part because it increases density and addresses lack of housing in some communities, he adds.

Finding the right fit

Retail landlords typically consider a variety of alternative uses that can add value and drive traffic and sales. That includes apartments, hotels, office, entertainment and restaurants. “We’re seeing a lot of demand for apartments at most of our sites today, but it’s not exclusively apartments,” said Varsamis. “In certain markets, office could be the right answer or it could be a mix of different uses. We don’t have a single lens. We look at all of our choices and move forward with the highest and best use.”

However, given the strength of the apartment market even through the pandemic, apartments have risen to the top of the list for many mall owners. Although apartment vacancy rates rose 60 basis points last year to 5.3 percent, vacancies are expected to remain relatively stable in 2021, at 5.2 to 5.4 percent, according to Moody’s Analytics Reis. The research firm also forecasts that rents will rise by 2.1 percent in 2021 and return to pre-pandemic levels in 2022.

Not every retail project is suitable for multifamily. It is important to conduct a market analysis that looks at the best use for redevelopment on a case-by-case basis, considers barriers to entry and understands how demand is trending. Spending the money to do that analysis is well worth it because it provides the road map on how to be successful, notes Maloney. Those who don’t do that analysis are taking on more risk, he adds. In some cases, the city might be willing to provide tax breaks or other incentives to encourage that extra housing development, which makes it even more beneficial to landlords, he says.

When it comes to its suburban malls, Brookfield is careful to look at where a particular city is in its maturity and growth cycle before committing to a new development. “Historically, people left the urban cores and moved out to the suburbs and the shopping malls followed,” said Varsamis. “Now what we’re seeing is these shopping malls evolving to become not just a pure retail project but a true town center where people will choose to live.”

Another key to adding residential is connectivity. “An easy answer would be to repurpose the parking lot, but that wouldn’t help evolve the overall asset,” Varsamis said. “The harder part is coming up with a thoughtful design that integrates closely with and enhances the shopping center.” At Alderwood, for example, Brookfield made a point to create a plaza connecting the apartments with the mall to emphasize dining and cross-shopping between the two. He said: “The energy that it creates is our overarching goal, and we purposely look at the connectivity and the design when deciding how we are going to integrate apartments into shopping centers.”