It's a beautiful spring Saturday 10 years from now. Shoppers are feeling optimistic — after all, the Dow has climbed back over 4,000. America has triumphed over the “Axis of Evil.” So they hop into their hydrogen-powered SUVs — to buy that sofa for the living room or to sample the latest vacation togs for their upcoming trip to Baghdad.
But where will they go? To the gigantic, newly renovated super-regional mall in the next town? To the mixed-use development down the road — the one with the hockey rink, the doctors' offices and as many restaurants as stores? Or to the home furnishings mall, crammed with furniture, antiques, linens and kitchenware, but not a pair of socks in sight?
Welcome to retailing's multiple-choice future. As much as malls and shopping centers have morphed in the past few years, even more changes are coming. The retail cycle is shrinking, change is accelerating and store sizes and formats are in flux. There will be some stunning new designs and lots of white-hot technology, but the biggest changes will be less obvious: redesigned malls with different kinds of anchors and different tenant mixes, and lots more space for non-retail uses. Everywhere, there will be a new focus on convenience, including, perhaps, daycare facilities and a place to check your coat.
No one can say for certain what the world of 2013 will look like, and interviews with industry insiders produce some predictable predictions. Developers with a heavy focus on enclosed malls say they'll remain the big dogs; those who've invested deeply in lifestyle and power centers think that they'll be on top, and that a lot of the older enclosed malls will be long gone.
Get beyond those disagreements, though, and a common vision emerges. The retail center of the future — whether it is enclosed or open-air, big or small, themed or general — will be designed to resemble a community, not just a place to shop. That means environments that place as much emphasis on recreation (everything from skate parks to jogging paths to entertainment complexes) as they do on consumption. The developments under way in 2003, as well as various remalling/demalling projects (see demalling story, p. 98), already point to a future in which retail blends with other functions.
Visually, the “shopping center” of 2013 might not look like an old-fashioned Main Street, but it will function like one. Consumers will be able to visit a grocery or a post office, keep appointments with doctors and dentists, relax with a workout or a facial, take in a movie, enjoy a gourmet meal or hang out with neighbors at an outdoor concert.
If this vision of the future seems familiar, that's because architect Victor Gruen, the father of the enclosed mall, painted it 50 years ago. The Austrian refugee envisioned just such a future when he sketched out his first mall in Minnesota in 1956, describing the mall as a way to replicate the community centers of the pre-automobile American cities in the new suburbs. “By affording opportunities for social life and recreation in a protected pedestrian environment, by incorporating civic and educational facilities, shopping centers can fill an existing void,” he wrote in 1960 in Shopping Towns USA. (See story on page 90.)
Clearly, Gruen's vision was not often realized. With a seemingly insatiable demand for new shopping venues, developers saw little need for non-retail amenities and focused instead on finding great locations, lining up the best tenants and creating attractive spaces for consumers to stroll from store to store. They succeeded from coast to coast: The regional mall was the ideal product for the America of the late 20th century — a land of upwardly mobile, mostly white, suburbanites living farther and farther from the urban core.
But the America of the 21st century is starting to take on a different look. And these changes affect what kind of consumers retailers will target and how they will want to reach them. The baby boomers, the huge demographic cohort that grew up with the mall industry, are now moving toward retirement. Their spending is expected to slow down as their income growth ends. That will pose some tough challenges for the department stores they patronize — and which remain the most important anchors at regional malls. “Who shops at department stores these days? People 50 and over,” says Kurt Barnard, president of Barnard's Retail Consulting Group in Upper Montclair, N.J. “Young people were brought up on specialty stores, and they avoid department stores.”
Ethnic and racial diversity will also play a role. Fast-growing Hispanic, Asian and African American populations are accumulating significant buying power. According to projections by the Selig Center for Economic Growth in Athens, Ga., the spending power of Hispanic-Americans will reach $926 billion by 2007, a 315 percent gain from 1990 — compared to an expected 131 percent gain for all American consumers. That Hispanic buying power, as well as that of Asians and African Americans, is concentrated in and around certain cities.
Figuring out how and where these consumers shop will play an important role in retail development. Hispanic families, for example, are known to take the whole family along when they go shopping. So, perhaps, a retail development that offers entertainment, dining and community events will draw more Hispanic families. Troy Peple, president of Chainlinks Retail Advisors of Vienna, Va., expects retailers to fine-tune their focus on these increasingly critical ethnic customers. “The more adept retailers will specialize more,” says Peple. “We are going to have retailers specializing more in ethnic clients in the local market.”
Finally, there is the trend of in-migration to urban centers and older, close-in suburbs from the outlying suburbs where the biggest regional malls are found, but where many consumers have grown weary of long commutes and lack of convenient amenities. Young professionals flock to 24/7 downtowns while empty-nester baby boomers are trading their suburban spreads for the restaurants, theaters and easy commutes of urban life.
The back-to-the city movement is a clear trend poised to continue well into the 21st Century, according to the Urban Land Institute. Inner cities will account for at least 40 percent of the total increase in U.S. purchasing power between 2000 and 2045, according to the U.S. Census Bureau.
Nationally, the increase in city housing permit activity from 1999 to 2000 exceeded the average annual increase in city housing permits from 1990 to 1998 by 35 percent. By contrast, suburban housing permit rose 21 percent.
From Boston to Miami to Denver to Chicago (see Market Report, page 154), retail development is following these new urbanists. Washington, D.C., is a good example. The district has seen a surge of retail development that reflects not only the gentrification of formerly blighted areas but also the rising affluence of the city's African American and Hispanic residents. In addition, developers recognize that the outlying suburban areas — where they have concentrated their energies for the past two decades — are reaching retail saturation.
An equally significant force shaping the mall of the future is income distribution. After almost 30 years of nearly stagnant income growth for the average American family, the great middle class, which has supported the conventional shopping center, is under stress. A decade from now, Peple says, “I don't think there's going to be a middle class. There's less today than there ever has been, and this affluence gap will continue to widen and accelerate.”
The erosion of the middle class is an ominous development for mid-price retailers, including department stores. “You'll see a continued decline unless they can recast themselves, and it's hard to compete on value,” Peple says. “The people who are on fire are the retailers that emphasize value, specialization and convenience.”
So, what's ahead for the mall industry? “The business is at a critical point,” says Nathan Forbes of The Forbes Co., a regional shopping center developer based in Southfield, Mich. “You have a depleting pool of retailers, a depleting pool of successful department store chains, and you have a lot of shopping center space competing for the same tenants. The developers that can show the most ingenuity in creating an interesting environment, both from a shopping and an experiential standpoint, will be the ones that will create an asset that'll withstand the test of time.”
Kurt Barnard is clearly of the opinion that the standard-issue enclosed mall will not stand the test of time. The consumer of the 21st Century, he maintains, finds the all-under-one-roof concept of the 1960s inconvenient. “Consumers are sick and tired of malls as they exist right now,” says Barnard. “They don't feel like going on an expedition when they want to buy a pair of shoes or some underwear,” Barnard says. “Consumers don't have the time or the inclination for this kind of expedition anymore.”
Stan Laegreid, a principal at Callison Architecture Inc., notes that while “maybe years ago, we were looking at 80 to 100 openings,” only two mega-malls are opening their doors this year. There are few available development sites, and the best markets are often dominated by powerful fortress malls.
So “maybe the mall of the future is going to be a stealth mall; it's going to be a mall, but one that is disguised as not being a mall,” says Gregg Pasquarelli, a Columbia University professor and co-founder of ShoP Architects. What he means is that we should expect retail to be developed on smaller sites and infill sites in a pedestrian- and mixed-use friendly way.
Simon Property Group, the biggest mall developer, does not necessarily dispute the analysis of critics — but it does challenge his conclusions. “Malls over time have begun to look very similar to one another. For the most part they have a similar tenant mix and are formatted the same way,” says Michael P. McCarty, senior vice president of research and corporate communications. “You need to constantly reinvent your offering, so it matches up with what consumer wants.”
But McCarty says it's important to separate fads from genuine trends. “Anybody who has been in this industry long enough to have perspective knows that we have a tendency to promote the concept du jour,” McCarty says.
Are lifestyle centers and outdoor formats a fad or a trend? Developers have built more than 10 million square feet of lifestyle center space since 1995. According to Retail Traffic's Developers Expansion Plans survey, at least 22 more such projects will appear before 2004. According to the survey, developers will produce about 8.25 million square feet of new regional mall space in 2003 and 8 million in 2004, down from the 11.5 million delivered in 2002. Six new regional malls will open next year, compared to 11 in 2001.
For now, Simon says, there's no need to choose one format over the other. “Our position has been that both of those concepts ought to be part of your repertoire,” McCarty says. “We certainly have done our share of lifestyle centers, and you will see an increasing number of them.” A prime example is Bowie Town Center, which Simon opened in suburban Washington, D.C., in 2001. “But open-air centers won't necessarily be the majority,” says McCarty. “We will build whatever is appropriate for the market. We would exclude nothing.”
That includes hybrid projects that blend styles. Simon's Mall of Georgia in Atlanta, for example, is considered the first mall built in the now-popular indoor/outdoor format. Taubman Centers, the upscale mall REIT that Simon is attempting to acquire, is also building its first open-air concept, Stony Point Fashion Park in Richmond, Va., opening this September.
Still, Simon concedes that its future growth is not based on building more regional malls — whatever the format — for a nation that already has 20 square feet per capita of retail space. “The key for us going forward is being focused on our existing portfolio of assets and making sure the innovations are in there,” McCarty says. That's why acquiring the Taubman portfolio is an important strategic goal. It's also why Simon and other developers invest so much in recalling and adapting existing properties to new formats.
In the near term, nobody is questioning the viability of the enclosed regional mall. These properties continue to enjoy low vacancies, increasing rents and steady lease renewals. Productivity for enclosed malls of all sizes, of which there are 1,182 in the U.S., was pretty much unchanged in 2002 — generating annual sales of $330 per square foot, just $4 less than a year earlier, according to the International Council of Shopping Centers.
But not all such malls are going to survive. The industry's less profitable malls are already struggling to reinvent themselves to capture new tenants and traffic. In a recent Wachovia Securities-sponsored conference call, members of the CB Richard Ellis Retail Services team pointed out that three distinct mall segments currently exist: Between 20 and 25 percent of the nation's 2,000+ malls are A quality or “fortress malls” and are typified by sales of more than $400 per square foot. Some 40 percent to 45 percent are “franchise malls,” with sales of $300 to $400 per square foot. The remaining 30 percent to 40 percent are “transition malls” — the ones that need help. In Atlanta, for example, Simon Property Group's Lenox Square would be considered a fortress mall, General Growth Properties' Cumberland Mall is a franchise mall, and privately held Greenbriar Mall is a transitional property.
“Retailers are limiting expansion activity to only the best locations, so fortress malls are holding on,” CB retail services senior manager Bob Burke says. “This segment is seen as the source of the greatest stability for the next 10 years.” Transition malls will likely experience a complete transformation within 10 years either into alternative retail formats such as power centers or non-retail uses, according to Burke. Many franchise malls will attempt an upscale shift in merchandise mix to attain fortress status or move downscale by bringing in more discount-store anchors and in-line tenants. For example, Faison & Associates closed its 27-year-old South Square mall in Durham, N.C. to rebuild a power center anchored by Target and Sam's Club.
How can these endangered malls be reinvented? Kurt Barnard's advice is to specialize. He believes that consumers will flock to centers that deal only in home furnishings or apparel or even footwear. If you know what you want, you'll know where to go. “That is the only way in which the mall ultimately will survive,” says Barnard.
Paco Underhill, the founder and managing director of Envirosell, a New York-based retail research firm, agrees that focused centers will become routine. “I think you'll see malls that are much more themed. They'll be after specific customers — people who are interested in home furnishings, the outdoors or luxury goods,” says Underhill.
“The future is local, not global. It will be much more integrated with hotels and housing,” according to Underhill. “The mall will be much more focused on what the customer wants and where it is. We'll see much more programming and we'll explore the broader edges of entertainment and sports.”
In fact, specialization is already happening. In the Georgetown section of Washington, D.C., the new Cady's Alley development has differentiated itself from the myriad other centers in the metro area with 130,000 square feet of retail focused mainly on furniture, accessories, floor coverings and bed and bath products. The project has drawn rave reviews — and rents of almost $60 a square foot. In West Palm Beach, Fla., the celebrated but struggling urban development called CityPlace is about to be recast in the same mold.
Building communities
The trend that makes the most sense to many crystal-ballers in retail real estate is the community center idea. Longtime May Co. executive and Build-A-Bear Workshop founder Maxine Clark, who has a reputation as a keen observer of retail trends, believes the most successful projects in the future will incorporate important family functions alongside retail stores — medical and dental offices, for example.
“There should be public places for events that bring people to the mall,” says Clark. “Maybe even portable kiosks that can be ‘rented’ by kids to sell their wares — i.e., Girl Scout cookies — from time to time, so [the center] is more community oriented. Maybe a sports arena on the grounds for soccer or hockey or whatever.” Anything, in short, that brings families together in a safe, secure and fun setting. That's why Henry Gruen's Southdale Center, the nation's first enclosed mall, featured a public auditorium, an ice rink and even a school.
Envirosell's Underhill would go a step further. He believes malls and shopping centers will evolve into “a combination of lifestyle-facilitation places where we can go and execute all of our needs, not just some.” That would mean malls with groceries, schools, day care and farmers' markets in the parking lots. (He also expects to see more malls with coat checks, which would encourage shoppers to spend more time — and money. “I don't understand why more landlords don't make that simple connection,” he says.)
Clark points to the Easton Town Center in Columbus, Ohio, as an example of a center that has already moved in that direction. “It is almost a community — shops, restaurants, hotels, big box, all basically on the property,” she says.
The 1.5-million-square-foot center, which opened in 1999, is a collaboration between designer Steiner + Associates, The Georgetown Co., The Limited and actor Arnold Schwarzenegger. It is pedestrian-oriented, with open-air squares, and even a children's park. Its anchors are Nordstrom, Barnes & Noble, Lazarus, Virgin Megastore and AMC Theaters. But it goes beyond the conventional: It has spas and a fitness center, for instance, as well as a comedy club and a mammography center.
Easton Town Center has also been more adventurous than other major malls in its tenanting. “This mall has allowed room for new tenants with new concepts,” says Clark. “They leased to us very early on” — a good move, given Build-A-Bear's popularity and rapid expansion to its current 116 stores where customers can create personalized teddy bears.
Yaromir Steiner, the president of Columbus-based Steiner + Associates, which specializes in “new urban retail” centers, believes the public thinks of shopping and leisure as linked activities.
“It goes back to how people have always liked things,” Steiner says. “Shopping and leisure were always mixed together in the town center, in the agora. They were always in the same general area.”
Steiner says future shoppers will demand better overall design. “People want shopping environments to give them a sense of place,” he says. “Their demand for good-feeling spaces is increasing. They are not willing to accept long hallways with anchors at each end anymore.”
Such innovation is already making its presence felt. In Durham, N.C., The Rouse Co.'s 1.3 million-square-foot Streets at Southpoint, blends mall and Main Street environments with individualized storefronts in the mall and its outdoor component to provide a seemless transition between streetfront and mall shopping. (Streets at Southpoint is the winner of a 2002 SADI award, page 126.)
Steiner also says that shoppers are no longer willing to accept inconvenience. “The old mantra of ‘Let's keep the cinema at the end of the parking lots’ is finished,” he says. They want it on the new “Main Street,” just like it was when the theater was downtown.
Outside areas “will have most of the leisure-time uses — clubs, theaters, bars — and also branded retailers, which will increasingly locate there because they don't need to be in a mall,” Steiner says. Strongly branded stores, including Talbots, Gap, AnnTaylor and Banana Republic, “have become a destination in their own right, and they don't need the validation of the department store.”
“We're going to go back to design inspired from city blocks that will be convertible to other things,” Steiner says. Convertibility means that a space developed for shopping could at some point be switched to another use, a flexibility that he says will lengthen the lifetime and the raise the value of the project.
Lifestyle lessons
Retailers, of course, are watching the industry's evolution closely, and one of the biggest, Federated Department Stores, isn't betting the farm that the traditional enclosed mall is a relic. At current rates of lifestyle-center construction, “there will probably still be only a third as many of those as regional shopping centers” in a decade, notes Gary Nay, vice president of real estate at Federated.
But Nay isn't dissing the benefits of lifestyle centers. Indeed, he says Federated has “paid a lot of attention” to their growth and has “experimented with a small store that might fit that format, but I think it will have a relatively small impact on us and the traditional department store.”
Still, he agrees that change is coming to the traditional mall. “The regional mall is certainly of a big concern to us,” Nay says, adding that some properties, especially the class C centers, “will have to get better or go away.” Those that improve will likely take lessons from lifestyle centers, which Nay says are tackling some important issues.
“There are a number of things that are being dealt with in open-air lifestyle centers,” including amenities and ambience,” Nay says. “The old regional mall frequently was lined with truck ports and delivery docks. When you drive up to a lifestyle center, you see restaurants and attractive landscaping. We'd like to see more of that — additional restaurants and leisure-time activities.”
Apparently Nordstrom agrees. The Seattle-based retailer has opened several new stores in hybrid indoor/outdoor malls in the past year. It even tinkered with its format, cutting store size from the average 190,000 square feet to 122,000 square feet to fit into Los Angeles' The Grove, an open-air project that has since become a prime destination for L.A. locals and tourists. (The Grove is another SADI winner, page 130.)
A few years from now, adds Nay, “you'll see a continued improvement in the overall environment of all our retail.” And he says there'll be a shift of emphasis inside the department store of the future: “We'll do a better job of trying to attract the mature customer. They spend a lot of money.”
Will that be enough to keep department stores in the starring role they have always played in mall development? Robert Taubman, CEO of Bloomfield Hills, Mich.-based Taubman Centers, thinks so. “People have pronounced their death now for years and years, but we strongly believe that consumers like department stores. They're highly promotional, often in the newspaper every day during the week. They're extending credit. They are a flexible stage for many different types of products,” he says.
No one expects Nordstrom, Bloomingdale's and Macy's to go away, but analyst expect the war of attrition to continue to eliminate some lesser names. “The Wal-Marts and Targets and Kohl's of this world have been kicking the crap out of the department stores and have a lot of momentum, and it's going to be hard to turn that back,” says David Kass, president of Continental Retail Development, a shopping center developer in Columbus, Ohio. “These guys have taken a lot of market share.”
“What you'll end up seeing in 10 years are shopping centers that are more of a hybrid — discount retailers mixed with specialty. The line has grown much funkier,” says Kass. That trend is illustrated by the new breed of power towns such as Desert Ridge Marketplace in Phoenix.
“We've been seeing a trend toward fewer department stores,” says developer Nathan Forbes. “When they go out through consolidation or bankruptcy, developers are looking at their options. Discounters? Additional uses like restaurants and ancillary retail, maybe a large Nike or Sony store? Are you better off taking a department store box and figuring out what else you can do with it?”
Maxine Clark figures that the department store will evolve, not become extinct. “While they're struggling, they'll still be around.” she says.” Department stores still play an important role, as they drive traffic to the parking lot with sales and their aggressive advertising.”
That does not mean that the same old department stores will have those anchor slots. Discounters such as Target and Kohl's may emerge as their replacements, Clark says: “After all, they are department stores.” If that happens, she says, it will be important for the mall and the discounters to work together to make sure their common interests are served.
Underhill, who wrote the bestseller Why We Buy: The Science of Shopping and has another book tentatively titled Walking the Mall coming out later this year, also sees nontraditional anchors stepping up to the plate. “The era of the department store anchor is coming to a close,” he says. “We'll see a broad collection of other types of stores as anchors.” Target, he says, could be “fantastic,” and L.L. Bean or upscale supermarkets could succeed nicely as anchors.
Simon's Michael McCarty believes there will be a big role for department-store anchors in the centers of the future, even open-air centers. He points to Bowie Town Center, which he calls “a poster child for what people think is the next generation of lifestyle centers.” Opened in 2001, it has a Main Street, lined with individual stores. But it also has two traditional anchors: Sears and Hecht's. Lifestyle centers “don't necessarily exclude traditional department stores. It's a concept whose architecture is being studied intensly by us and others.”
With whatever changes occur in shopping center design, with whatever shifts might take place in tenant mix, the one thing that nearly everyone agrees on is this: The successful properties of the future will be the ones that try hardest to make shopping a good experience. That means creating places where people want to be — not just because it's where they have to go when it's time to replace those ratty bath towels. “There will be a recognition that the customer's experience starts in the parking lot, and there will be a driving desire to define your mall as something different from the next mall down the road,” says Underhill.
The consequence of that, says developer Steiner, will be a great deal of renovation and upgrading of existing properties. “There is going to be a wholesale recycling of the retail environment in the coming years. There will be a revolution in quality.”
Deciding what to build and where — and how to even approach the decision — will be the challenge for developers and retailers in the coming decade. “Malls are at a very important time,” says Clark, who believes that developers need to do some serious soul searching and start asking themselves whether they are really doing what's right for the consumer. To meet all the needs of a changing America, the retail real estate industry might have to sacrifice some sacred cows and rethink many assumptions. But, Clark is optimistic: “It's times like these when people dream their best.”
Beyond Lifestyle
The outdoor elements of today's lifestyle centers may just be the start. As retail and mixed-use projects attempt to attract consumers with community activities, look for more park-like spaces to be built, with jogging paths, duck ponds and band shells.
ENCLOSED MALL
The enclosed mall is dead! Long live the mall! The mall will evolve, perhaps incorporating different types of anchors and adding services and amenities to give consumers something more than a great selection of stores. Increasingly, however, malls may be attached to open-air and mixed-use projects.
Big-Box Store
Unless the biggest trend in retailing — the triumph of the big-box stores — suddenly reverses, the coming decade will bring these upstarts into mainstream retail real estate development. Power centers are morphing into power towns and traditional malls as well as lifestyle centers are looking for ways to accommodate these high-traffic tenants.
MIXED USE
With space at a premium and Americans tiring of the perpetual traffic jam, mixed-use development will become even more pervasive. But the uses will multiply. In addition to retail, office and residential components, these projects are also likely to have venues for civic and social functions — post offices, day care centers, community theaters.
ENTERTAINMENT
The trend toward mixing shopping with recreation is here to stay. But the retail center of the future won't be complete with just a movieplex. There will be a range of diversions to keep the traffic coming: an aquarium, a comedy club, an IMAX, a concert venue.
Think 24/7 lifestyle.