In today's floundering market, mall owners are finding value incorporating open-air elements at enclosed malls and repositioning the properties as lifestyle centers.

Macerich Co. has four redevelopment projects under way right now: Northgate, a 725,000-square-foot enclosed regional mall in San Rafael, Calif., Scottsdale Fashion Square, a two-million-square-foot mall in Scottsdale, Ariz., Santa Monica Place, a 550,000-square-foot mall in Santa Monica, Calif., and the Oaks, a one-million-square-foot mall in Thousand Oaks, Calif.

At least two of the redevelopments will feature new open-air components, including an indoor/outdoor food court and a multi-modal pedestrian path at Northgate and open-air walkways, outdoor public plaza and rooftop dining deck at Santa Monica Place. At the same time, the Santa Monica, Calif.-based Macerich Co., owner of 81 million square feet of retail space, is also working on a lifestyle addition to the Oaks.

“As the economy recovers, we'll see business returning to those centers, we'll see retailers like Ann Taylor and Williams-Sonoma begin expanding again,” says John Bemis, executive vice president and director of leasing with Jones Lang LaSalle Retail. “I don't think the [downturn] is going to put an end to the genre. It's certainly going to slow expansion, just as all development has slowed during the credit crunch. But [lifestyle centers are] a fundamentally sound platform.”

Although the Atlanta-based third-party property manager with 35 million square feet of retail isn't undertaking any redevelopment projects now, Jones Lang LaSalle Retail anticipates starting several in the Midwest later this year.

As the real estate industry struggles with a frozen credit market and slumping demand for retail space, many mall owners have been putting redevelopment projects that require a significant investment on the back burner. However, in spite of how redevelopment of large regional malls is more financially challenging than in years past, projects are proceeding, according to Brett Hutchens, Columbus, Ohio-based developer Casto's partner in charge of retail development in the southeastern U.S. And, in many cases, they are employing the same strategies popular at the peak of the most recent real estate boom, such as enhancing the common areas, incorporating green design elements and adding open-air and lifestyle components.

Next month, at its Promenade at Temecula, Forest City Enterprises will debut a 126,000-square-foot lifestyle component. The $120 million redevelopment includes an outdoor gathering place for customers, renovated food court, upgraded restrooms, children's play area and a new entrance, notes Kenneth Lee, vice president of West Coast commercial development at Forest City. Forest City Enterprises is a Cleveland, Ohio-based developer with approximately 13 million square feet of space.

Strength in numbers

Meanwhile, at its Randhurst Mall in Mount Prospect, Ill., Casto has undertaken a $150 million redevelopment that will transform the 1.4-million-square-foot mall into a mixed-use center featuring hospitality, entertainment and residential components.

Casto has demolished the existing two-story core of the mall to make way for the lifestyle center and will use the property's basement level to create new parking for the non-retail uses. Within a five-mile radius of Randhurst Village are currently 321,541 residents whose average annual household income is $79,518. Casto felt comfortable proceeding with the redevelopment because Randhurst Mall is located in a well-established market with strong tenant demand, says Hutchens.

Similarly, a few years back, Forest City saw the population growth surrounding Temecula and realized the appeal the area's demographics would hold for retailers. As of 2007, there were 303,624 residents living within the Promenade at Temecula's primary trade area, with an average annual household income of $88,681.

Lifestyle center additions will also be the strategy of choice for Jones Lang LaSalle, should the company get the green light on three potential redevelopment projects later this year in the Midwest. Jones Lang LaSalle has already started work to secure lifestyle-oriented retailers for these smaller projects, ranging from $10 million to $15 million.

To draw more shoppers into the Oaks, its enhancements will include a 14-screen Muvico movie theater and a two-level parking structure for 1,250 cars, as well as 32,500 square feet of freestanding restaurants. Macerich's executive vice president of development John Genovese says the company will spend $250 million on its Spanish-revival style redevelopment that will also include fountains, extensive landscaping, mosaic accents and a piazza.

Green machine

Another element that continues to pay dividends in the redevelopment of large centers is green design. At Macerich's Northgate center, some of the green elements will include high-efficiency heating and cooling systems, water-efficient landscaping, increased use of natural light, a white roof to reduce the heat island effect and reuse of some of the original building materials. At Santa Monica Place, the company will add a solar roof, make a change in lighting fixtures to reduce light pollution, increase natural air ventilation and recycle a large portion of the construction debris, among other measures. When the centers are completed this year and next, Macerich will explore LEED certification for both. According to Genovese, the return on investment on environmentally sustainable practices and their appeal to tenants far outweigh the additional expense.

Going forward, Jones Lang LaSalle Retail too will consider LEED elements for its redevelopment projects. “The retailers are asking about it and owners are asking about it too, so we have to respond to these environmental issues,” says John Schupp, senior vice president of development services with Jones Lang LaSalle Retail.

For instance, he says, Jones Lang LaSalle Retail has been changing almost all lighting to fluorescent, because lighting is a major operating expense. It's also examining recycling costs and LEED certification for some of its properties as well.

Challenge versus reward

However, even those companies that forge ahead executing redevelopment strategies find that it's no easy task given the current market conditions. Redevelopment, as a rule, requires the addition of new tenants, according to Schupp, and very few retailers have plans to expand given today's economic climate. When Forest City began work on the Promenade at Temecula, for example, a few of the retailers it had secured for the expansion almost pulled out of the project citing the declining economic conditions, says Lee (although most ended up signing leases anyway).

In the case of Randhurst Village, Casto had to go after existing tenants in the Mount Prospect marketplace to augment bringing in new retailers, notes Hutchens. “I think relocation is an easier analysis for the tenant, because when they are in the market, they know what their sales are, they know what their marketing costs are,” he says.

The good news in the current downturn is that it has resulted in more affordable construction costs, says Schupp. In November, the most recent month for which data is available, the construction materials price index fell 3.2 percent compared to October, reported Reed Construction Data, a Norcross, Ga.-based data provider. For the past several months, prices for diesel, asphalt paving mixtures, precast concrete and fabricated building steel have been on the decline, in some cases by double digits.

With construction starts down across all sectors, labor is cheaper cites Hutchens. Since its peak in September 2006, the construction industry has already lost 899,000 jobs to date, according to the U.S. Bureau of Labor Statistics.

Hutchens says, “It's kind of a catch-22, because it's very difficult to [secure enough leasing] to get a project done. But, if you can, the costs are going to be lower.”