When Yorktown Shopping Center opened in 1968 in the Chicago suburb of Lombard, the enclosed regional mall spanned 1.3 million sq. ft. and ranked as the largest retail mecca in America. Anchored by four department stores and located at a busy interchange off a major tollway, the center was a classic model for hundreds of other malls still to come.

Two of the department store anchors — Wieboldt's and Montgomery Ward — are long out of business. And Yorktown, plagued by vacant spaces in recent years, is in the process of a $50 million makeover. Most of the Ward store has been torn down to make way for an open-air lifestyle addition of 230,000 sq. ft. — the Shops on Butterfield — that will feature a bowling alley, restaurants, and dozens of small, high-fashion merchants.

Off-price retailer Marshalls is taking a prime space, something that would have been unthinkable in the mall's strictly full-priced heyday. Big-box tenant Sports Authority is taking another space. At one end of the parking lot, a 500-room Westin Hotel with convention facilities is scheduled to open by August.

Just as it did nearly four decades ago, Yorktown is almost certainly pointing the way toward a new era of retail development. With department stores either out of business, consolidated or wary of expansion, the old ideal of the super-regional mall with powerful corner anchors has been given up for dead. In fact, there hasn't been a really big enclosed mall built anywhere in the U.S. since 2004, and none are planned to open this year or next.

Mall confusion

Mall replacements are evolving so quickly that nobody can agree on exactly what the new model is, or what it ought to be called. Some developers are erecting lifestyle centers with no department store anchors or big boxes of any type. Others have created a variant with discount tenants called omnicenters. Still others add hotels, condominiums and offices, and promote them as mixed-use projects.

The dawning conclusion: All of the old rules and distinctions are out. Diversity is the new byword. Developers are willing to mix and match practically any kind of tenant in creating shopping environments with an eclectic urban feel. They've got grocery stores and movie theaters and high fashion shops all jumbled together.

A roof? Not hardly. The old enclosed mall is considered très 1970s by the Smart Set. Call these new venues lifestyle centers or town centers or omnicenters or whatever. The best description may be to just call them hybrids — borrowing ideas and layouts and tenants from every other category of shopping to fuse a unique and unpredictable retail experience.

“In recent years retailing has become too segmented,” says Robert Long, the president of Long/Pehrson Associates, which has owned Yorktown since it opened. “What we've come to discover is that the woman who shops at Neiman Marcus also shops at Target and even Marshalls. There is no reason why malls can't be designed to take in all those names together.”

Remaking old malls

The old malls like Yorktown need something, because they've been losing marketshare in overall retailing for years. A decade ago, according to the National Research Bureau, there was 10.31 sq. ft. of mall retail space per household in Los Angeles. That ratio fell to 9.57 sq. ft. per household by last year. Similar declines have been noted in almost every other big city. In Chicago, for example, mall space fell from 11 sq. ft. per household to 9.12.

Investors in the mall sector may be growing uneasy. Mall REIT stocks shot up a healthy 20.7% in 2006. That's healthy until you consider that REITs overall gained 29.2% last year and malls were the weakest of all categories. Ross Nussbaum, an analyst at Banc of America Securities in New York, expects mall REITs to generate a total return in 2007 of 4% to 8%.

Retail construction in the U.S., pegged at 252.2 million sq. ft. in the first 10 months of 2006, was down 6% compared with the same period in 2005, according to McGraw-Hill, which found that big- box power centers had the steepest decline of any category, down 17%. The fastest growing category has been mixed-use retail, which represented 4.9% of all retail construction in 2002, a share that grew to 10.5% last year.

Tapping consumer reality

Malls in the classic format aren't likely to be revived anytime soon. John Melaniphy, president of Chicago retail development consultant Melaniphy & Associates Inc., points out that mall stalwarts have left the marketplace.

“Sears isn't building big new stores now and Penney has said that it wants to build free-standing stores in the future,” Melaniphy says. “In a society where women work, we're all in a hurry. That's why smaller centers with separate entrances for each store work.”

The mall developers are giving in to these new realities, at least in part. Chicago-based General Growth Properties unveiled the open-air 980,000 sq. ft. Pinnacle Hills Promenade in Rogers, Ark. last October with just two department store anchors, Dillard's and J.C. Penney. “Villages” of big boxes opposite lifestyle tenants and restaurants are all matched with 80,000 sq. ft. of offices atop the stores.

Elsewhere, General Growth, which owns 200 malls, plans to open smaller lifestyle centers in places like Peoria, Ariz. where the Parke West center will encompass a modest 356,000 sq. ft. The company is also embarking on numerous remodelings of older assets like the Nadick Mall near Boston, which is getting two condo towers with 240 new living units.

“Five years ago we primarily grew by acquisition. Today we have to grow by developing and redeveloping,” says John Bucksbaum, General Growth's CEO. “For years there was a build-it-and-they-will-come attitude among mall operators. Change came slowly, and as consolidation occurred people weren't prepared financially to reinvest in their properties to make them more modern. Today, you can't allow that to happen.”

At Simon Property Group, the nation's largest mall owner based in Indianapolis, the company was hard hit last year when the merger of May Co. and Federated Department Stores Inc. left Simon with anchor holes at seven malls.

Rather than try to recruit new anchors, Simon decided to remake all seven store pads — a là Yorktown — into lifestyle centers appended to the malls. The Castleton Square Mall near Indianapolis is one example: a 197,000 sq. ft. L.S. Ayres department store was closed last year, with a Macy's remaining as an anchor in the center. Simon is planning a theater, bookstore and restaurants on the Ayres site, with most tenants expected to be open by Christmas season this year.

What really preoccupies Simon of late, however, is its all-new construction projects. In November, the company opened its 1.2 million sq. ft. Coconut Point in Estero, Fla. The hybrid center includes lifestyle tenants such as J. Crew and Coldwater Creek positioned opposite OfficeMax, Bed Bath & Beyond and other big boxes. Coconut Point also includes 35,000 sq. ft. of offices and 290 condos, the latter developed by Kosene & Kosene Residential LLC, an Indianapolis residential builder.

A decade ago Simon never considered mixed-use. It's top of mind now, though. Les Morris, a company spokesman, says that there are challenges. “Our expertise is in retail, not offices or apartments. We're partnering with experts in those sectors.”

Even if new malls have become a rarity, the existing assets in Simon's portfolio are doing fine. Late last year the company reported that its mall sales rose nearly 7% from the year before to $474 per sq. ft. The centers were 92.5% occupied, with rents up an average of 3% to $35.23 per sq. ft.

Picking and choosing

In December, mall owner CBL & Associates Properties acquired a 147-acre site in a suburb south of Houston. The Chattanooga, Tenn.-based company is planning a curious melange within its 1.2 million sq. ft. open-air Pearland Town Center. A Macy's and Dillard's will be flanked by both lifestyle tenants such as Chico's and Victoria's Secret and outlet tenants such as Ann Taylor Loft and 346 Brooks Brothers. The center will include a 110-room Courtyard by Marriott and office and apartment space.

“A decade ago we wouldn't have considered anything like this. We would have just put up a conventional mall with four department stores,” says Stephen Lebovitz, president of CBL. “We've turned to this for several reasons. First, municipalities love the concept of mixed-use. Land has become more expensive and we have to develop with more density to get a return on our investment. Also, Houston already has a dozen enclosed malls.”

Everybody, it seems, is borrowing elements of the lifestyle centers pioneered by Poag & McEwen Lifestyle Centers LLC of Memphis, which built the first modern lifestyle center, Saddle Creek, in Memphis 20 years ago. But Dan Poag, the CEO, says that his work is changing course.

Last fall Poag opened the Promenade Shops at Dos Lagos in Corona, Calif. with a first phase of 370,000 sq. ft. of retail as part of a master development with housing, a hotel and offices. It's only the second mixed-use project that Poag has done.

Are such big centers still lifestyle? Dan Poag thinks so. “When regional malls were being planned 20 years ago, developers went to the department stores first as the most important part of a project. Today, developers go to the smaller in-line retailers first to see how they want to be configured,” says Poag. “If we have a spot for a department store, we might add them in. But today department stores are the afterthought,” Poag adds.

Uniqueness pays off

Lifestyle centers can generate amazing returns. Jeffrey R. Anderson Real Estate Inc. of Cincinnati, a lifestyle developer, spent about $75 million building the 420,000 sq. ft. Geneva Commons lifestyle center in suburban Chicago. Less than three years after it opened in 2002, it sold for $125 million to an investment partnership that included Morgan Stanley.

Obtaining debt capital is a breeze

“Investing in these centers can be very lucrative,” says Mark Fallon, Anderson's vice president of real estate. His firm has been selling to buyers willing to pay prices based on a capitalization rate of 6% and even less. But he worries that too many developers and speculators think such success can be replicated anywhere.

Despite the risks, lenders are jumping on the mixed-use bandwagon. Developers report that banks and other institutions have been willing to finance 95% and even 100% of projects with substantial pre-leasing. They're even willing to bankroll office and hotel construction, too.

“Mixed-use historically has always carried more baggage in the eyes of lenders,” according to Jason Choulochas, west regional director for Wrightwood Capital LLC in Newport Beach, Calif. “But in the past five to seven years it's lost much of that stigma.”

Choulochas says mixed-use provides an opportunity for retail growth.“New retail projects have built-in customers from surrounding apartments, offices and hotels. That gives you great downside protection on your investment.”

Lifestyle longevity?

What will the shopping center of the future look like? Developers worry that the lifestyle of today will look antiquated in a few years. “We're all watching Wal-Mart continue to grow. They have a huge influence on everything that happens,” says Jeffrey Bayer, CEO of Bayer Properties LLC in Birmingham, Ala., which is building centers with public libraries and other unconventional tenants.

Melaniphy, the Chicago consultant, thinks that lifestyle centers will only get better and more ubiquitous. “We have an aging population, and older shoppers who eat out a lot, and love lifestyle centers,” he says. He figures mixed-use will only gain in popularity, too. “People like to live close to shopping and restaurants. It makes sense to build them all together,” Melaniphy says.

He doesn't exactly say it, but the gathering of shopping, eating, working and living in one place used to be called towns and cities. The new mixed-use builder is, in effect, erecting communities from the ground up.

H.L. Murphy is a Chicago-based writer.