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Power moves

New formats help developers rejuvenate enclosed centers

By Kevin Kenyon

Converting Anaheim (Calif.) Plaza to a power center helped Donahue Schriber revitalize the property.

Anaheim Plaza, which opened in 1954, had a successful run in its former life as a three-department store, one-level enclosed mall.

But its area gradually shifted from white to blue collar, and the center's merchandising no longer appealed to its new customers.

Meanwhile, several new regional malls entered the trade area, including Mainplace, Westminster Mall and Brea Mall. Finally, Anaheim Plaza's then-owners, the California State Teachers Retirement System (CalSTRS), realized that something had to be done.

After a series of management companies had little success in fixing the situation, CalSTRS brought in a new management team in 1993 to redevelop the property.

"They basically had nothing -- they weren't getting any return on their invested capital, so they had to look at writing down the value of the property," said Daniel W. Donahue, chairman of Donahue Schriber, the Newport Beach, Calif.-based developer retained to remake Anaheim Plaza.

The next year, Donahue demalled the center by tearing down everything but a Mervyn's, and converted it into a power center that would not directly compete with the newer regional malls in the area. Now anchored by Wal-Mart, Anaheim Plaza is one of Donahue Schriber's most successful properties, according to Donahue, who says his company is constantly on the lookout for such opportunities.

"We're always searching for these types of situations, where perhaps we have a different vision or feel that a property might be better served in some type of new format," he said.

The story of Anaheim Plaza -- an aging center past its prime -- is hardly unique in today's competitive retail landscape. While the booming national economy has generally had a positive impact on the retail landscape, the fact remains that a number of shopping centers have not benefited from the upturn.

Many of these so-called B, C and D centers have either been out-positioned by newer retail properties or have gradually succumbed to shifting demographics.

Although the prime location of many of these centers make them valuable commodities, most are unable to survive in their current state.

The situation is presenting unprecedented "demalling" opportunities for shopping center developers across the country, according to industry insiders, and a growing number appear to be taking advantage by converting these projects into power and community centers.

"I can't speak for the rest of the country, but there's quite a bit of retrofit going on in California," Donahue explained. "You see more and more of the physical plants trying to incorporate some of the big box and category dominant stores."

To Donahue, the demalling trend is all about developers positioning themselves to take advantage of shifting market conditions.

"I see it as adapting to the tenants that want to make deals in the market, because those are people that are building new brick-and-mortar stores today," he explained. "In some cases stronger competition has come in, in other instances demographic changes have occurred."

That's not to say, however, that demalling a property does not present financial risks, Donahue said.

"First and foremost, it's a very capital-intensive process, so it's a matter of making the evaluation to see if it can work," he explained. "If it does, I believe it's an option for many distressed properties out there."

The process presents many complicated financial issues, said John Cole, principal of Arrowstreet, a Somerville, Mass.-based architectural firm that has worked on a number of demalling projects.

"The way I see it, somebody has to take a financial hit and write down the value of the property before it can be recapitalized and transformed into something different," he said. "It takes a lot of money to reorganize them physically, and the rent structure that's going to be in place is significantly below the rent structure of a regional mall, from about $25-$30 a square foot to $15-$20 in many cases."

Consequently, a new development company is often needed to come in after the value of the property has been written down.

"The typical sequence you see is a mall owner with a B or C center either loses the property or sells it, then it goes through a bank or an insurance company," Cole explained. At that point, he added, it is usually picked up by someone specializing in open-air type centers who is willing to make the necessary investment.

Such a scenario took place in Salem, N.H., where Arrowstreet helped New Hyde Park, N.Y.-based community center developer Kimco transform Rockingham Mall into a successful power center.

"Kimco came in and took over after the value of the property had been written down," he said, adding that the center had become obsolete due to a new super-regional that opened just a mile away.

The demalling concept called for demolishing a portion of the existing center to create the right dimensions for big-box tenants, as well as to add more parking.

Depending on market conditions, demallings have also been known to develop into hybrid centers that serve a variety of uses.

When officials at Chicago-based Landau & Heyman acquired Muscatine (Iowa) Mall in a package of five centers from a joint venture of Teachers Insurance and Annuity (TIAA) and The Rouse Co. last July, they decided to create a hybrid center, according to Michael Fontana, asset manager responsible for the property.

"We felt that the market had the right element for a front-facing retail shopping facility," he said. "We had demand from retailers and a physical facility that would lend itself to such a conversion."

Of the five acquired malls, Muscatine was by far in the most distressed condition: Two of its three original anchors -- a Wal-Mart and a Von Maur -- had gone dark, Fontana said.

At its peak, the mall maintained an overall occupancy of 91%, but that number had been reduced to 65% at the time of acquisition, he added.

The main problem was that shoppers were bypassing the mall to shop at newer facilities in the Quad Cities, 25 miles north of the city.

"One of the things we liked about Muscatine was it remained the dominant retail facility within the local market," he said. "The location was ideal, but bigger and better malls built in the '80s in the Quad Cities had attracted away the good anchors, and was close enough that people were going there to do serious mall shopping."

After concluding that its future was not as a traditional enclosed mall, the decision was made to go in another direction, Fontana said.

"We were fortunate that the physical configuration of the center -- it was not set too far back from the main road -- lent itself to the possibility that we could turn the whole front half of the mall into street facing retail."

The front part of the mall, which is expected to be completed late next year, will feature an existing Menard home improvement store as well as several new tenants, including Staples, according to Fontana.

But instead of tearing down the roof, Landau & Heyman will retain the enclosed portion of the mall to serve an unusually high demand for office space in such a small market, Fontana said. Muscatine is the home of two Fortune 1,000 companies -- HON Industries, an office furniture manufacturer, and Bandag, which makes tread rubber for tires.

In the rear, an existing JC Penney and a Fridley movie theater will be retained. As a result, the center will eventually have elements of a strip center, a traditional enclosed mall and an office complex.

"You might call this a 'psychic' demalling," Fontana said. "There will be no major demolition, other than tearing down the existing front facade to make it look more like a strip center."

Finding projects with the necessary ingredients for demalling such as Muscatine is no easy proposition, according to Patrick B. O'Leary, Landau's managing director and CEO.

"Some of these projects do lend themselves to conversion, but they are very challenging from a physical and economic justification standpoint," he said. "One of the things that helped make this project work is the demand for office space, which is pretty unusual for a market of this size.

While the case of Muscatine Mall may be unique, the ability to find and evaluate such opportunities today is nothing short of crucial, O'Leary said.

"We believe there is a great future in bringing centers like Muscatine back to life, but it's important to remember that each center presents its own unique set of circumstances."