Not long ago, Innovation Property Group provided an overview of the challenges facing mall owners, retailers, and suburban communities. You can check that topic HERE.
We were mainly concerned about what should be done about closing or underperforming malls. Should we be focused more on their new uses, or should we consider converting them, rather than demolishing existing malls?
This piece today will try to look at the barriers that must be addressed in order to convert malls into financially viable real estate assets.
Let’s rewind: Why did malls suffer such a decline?
Real estate experts know that the main culprits for the shopping center activity decline are the growth of e-commerce, the shifts from purchasing goods to buying services, and of course “the sickness of our consumeristic habits” – just too many stores per capita.
Why Does Mall Redevelopment Take So Long?
Malls are usually the first real estate assets to struggle with the need to keep up with consumer preferences. They need to change their retail mix or to completely redevelop their properties in order to contribute significantly to the challenges.
Also, conditions like shared ownerships, multiple parties, and complex retail leases are often intertwined, adding greater complexity to the problem.
Mall operators’ ability to freshen the retail mix and/or redevelop has become quite a challenge. And challenges usually take time. Let’s see how each of those obstacles works in real life.
Multiple Parties Owning Malls
Mall structures and their surrounding (parking, road facilities, restaurants, banks, and stores) are rarely owned by just one entity. Also, one owner or lessor may lease the inline spaces occupied by small retailers.
This, shared ownership, an arrangement was employed (and in many cases is still used) by mall developers. They wanted to attract national chain department stores.
These department stores were considered the basis, or anchors for incentivizing consumers to make a trip to the mall.
Once the anchors were in place, developers were able to lease “inline” space, to smaller retailers that depended on them to generate traffic.
The result was a very complicated and jumbled situation. Although the facts may differ from mall to mall, they’re saddled in similarly complicated rights and obligations among parties.
The bottom line: Mall owners must often obtain third-party consents before they can make changes to their malls.
Reciprocal Easement Agreements (REAs)
Two main operative types of legal agreements that cement the relationships between mall owners and retail operators are Reciprocal Easement Agreements (REAs).
REA’s are typically executed between the mall developer/owner and each owner of an out parcel. Complex retail leases commonly exist between the mall operator or owner and retail tenants.
So why are these agreements an impediment to redevelopment?
The most important impediment of REA’s is the requirement of consent from multiple parties. As we know, not all parties are privy to each other’s agreements, and all the larger issues must be addressed collectively by all of the mall owners.
Complex Retail Leases
Retail leases govern the relationship between landlords and tenants. In the commercial real estate industry, these leases are typically considered more complex (compared to office or industrial leases), largely because of restrictions such as:
- What the tenant can sell
- Restrictions on the activities carried out by other tenants, and
- Co-tenancy clauses
Based on the performance of the retail businesses, and the location of a shopping center or mall, these clauses stipulate a series of conditions that provide both protection and restrictions for a retailer.
For example, if a tenant leaves or ceases to operate, other tenants may be allowed to pay less rent, reduce their operating hours or even terminate their lease.
One of the fundamental reasons for these retail leases and their rules is to exist is to provide the mall owner with more control. They controlled the entire environment, even the messaging and the marketing, all in order to create branding and experiential synergies.