By Daniel B. Myers and C. Gregg Ankenman, Wendel Rosen LLP
Between the rise of online shopping and Coronavirus, retailers throughout the country are reeling. Owners of shopping centers are facing an uncertain future. Landlords must adapt to these changing circumstances to survive.
Innovation is happening at projects throughout the country. While there is no one-size-fits-all solution for all shopping centers, these examples may provide a roadmap for the future. Below, we list three ways shopping centers owners are transforming their projects and describe several legal issues that arise because of these changes. We also briefly discuss how the COVID-19 pandemic further accelerates the need for this transformation.
What To Do With A “Dead Mall”
Some shopping malls will not survive in their configurations with current tenants. Therefore, owners will need to find alternative uses for centers.
In the Bay Area, LBG Real Estate acquired Hilltop Mall in Richmond, California to redevelop it into a master-planned residential, retail, and office community.
Hudson Pacific Properties and Macerich leased almost 600,000 square feet at Westside Pavilion in Los Angeles to Google. Google intends to turn the three-story mall into creative office space with its workers able to use restaurants and a movie theater in neighboring parts of the project.
Transforming Existing Centers
The owners of Hillsdale Shopping Center in San Mateo, California recently completed renovations to transition the mall into a mixed-use, community destination with expanded food options, common space for co-working opportunities, a high-tech cinema, and outdoor spaces for shows, concerts, and community gatherings.
The Westfield San Francisco Centre is converting two upper floors to office space; and at Stoneridge Mall in Pleasanton, California, Simon Property Group leased a portion of the mall to Stanford Health Care for office and medical uses. Simon is also redeveloping another part of Stoneridge Mall previously occupied by Sears as a 285,000-square-foot, mixed-use retail and recreational project including a cinema, lifestyle fitness facility, restaurants, and a specialty grocery market.
Many online-only companies have begun to look for opportunities to start occupying physical locations. The COVID-19 pandemic may cause some of these companies to rethink their plans, but there has been a steady increase in store openings for formerly online-only retailers in recent years. These locations allow for pick-ups and returns for online purchases, as well as opportunities to view products in an experiential setting.
Earlier this year, Westfield Valley Fair in San Jose opened its “Digital District” incubator zone. Eight formerly online-only retailers now lease space in the Digital District for their first brick-and-mortar location.
Traditional retailers are also embracing these trends by transforming their stores to provide unique shopping experiences – customers can sample, look at and feel products, as well as interact with demonstrations. In this new marketplace, customers come to the store for more than a simple purchase. They need to have the added value of a compelling and entertaining experience. They can then order the products at the store and have them shipped directly to their house.
Before closures due to the COVID-19 pandemic, brands such as Amazon, L’Occitane, and Nordstrom were attempting to create new, immersive shopping experiences.
Shopping center owners must be prepared to replace traditional retailers’ shrinking footprints with new locations for formerly online-only retailers and other alternative users. Owners need to think about flexible, multi-dimensional spaces with less dedicated square footage for storing inventory.
Legal And Practical Implications
These innovations have several legal and practical implications.
- Zoning, Use, and Code Compliance: Landlords who find new uses for underutilized or vacant spaces may need new approvals from cities, regulatory agencies, and other local jurisdictions. Such changes may trigger fire and building code upgrades, as well.
- Restrictions in Existing Leases: Leases with existing retail tenants may include prohibitions on certain non-traditional tenants and uses within the shopping center. In addition, tenants may also have exclusive-use rights. In centers where existing retailers will remain, landlords must carefully review and address all restrictions in leases before redeveloping any portion of the shopping center.
- Restrictions in CC&Rs and other Recorded Documents: Recorded covenants, conditions, and restrictions (CC&Rs) may restrict certain uses in the shopping center. Even if the center is going to be entirely redeveloped, landlords will need to address these restrictions.
- Parking: Different types of users will have greater parking demands. At the same time, with increases in ride sharing and the future impact of driverless cars, parking-need calculations may look very different. Parties must anticipate these changes. Owners concerned about parking availability should consider designating protected parking areas, specifying minimum numbers of available spaces, and/or requiring parking management programs.
The Elephant In The Room: COVID-19
The COVID-19 pandemic has only accelerated the need for change. Major retailers are declaring bankruptcy. Others are closing stores. Those who survive will need to adjust store layouts and experiences to conform to density limitations and the health and economic requirements of future retail customers. The shopping center model will need to be transformed in the coming years to adapt to all these challenges.
The evolution of shopping centers presents both opportunities and challenges for landlords. Owners, who can anticipate these evolving trends and adapt will be better prepared to handle change and take advantage of opportunities as they arise.
About The Authors
Dan Myers and Gregg Ankenman, both partners in the Real Estate Practice Group at Wendel Rosen LLP, frequently represent clients on leasing and other real estate transactional matters throughout the country. They can be reached by phone at (510) 834-6600 and by email at email@example.com and firstname.lastname@example.org.