Folks visiting Rock Springs, Wyo., might be surprised to see what filled a long-vacant anchor spot at the White Mountain Mall. It’s the country’s first mall-based Harley-Davidson dealership—an acre of biker bait, with shiny new Harleys sitting just about where the cosmetics counter would be if it were a department store.

A motorcycle dealership anchoring a mall is a bit outside the mainstream, but maybe not for long. With department stores no longer the dominant retailing force they once were, malls are getting creative in filling empty anchor space, sometimes in ways that would have been scoffed at even a few years ago. Discounters, home-furnishings retailers, bookstores, entertainment centers, restaurant clusters—all can be found where department stores once ruled.

“I think the list of potential opportunities will continue to grow,” says Robert A. Michaels, president of Chicago-based General Growth Properties, the nation’s second-largest owner of shopping centers. “At least for the regional mall business, this has become an opportunity to put in better retailers.” Even upscale supermarket chains such as Gelson’s and Wild Oats are being considered as mall owners aim to make their properties one-stop shopping destinations.

These alternative anchors have big shoes to fill in replacing the department stores, though. Developers like the highly promotional nature of department store business, with daily newspaper and television advertising blitzes providing a constant attraction to the malls. Discounters and some sporting goods chains advertise on a comparable level, but bookstores, restaurants and entertainment-oriented venues spend less money to draw people in. Department stores also offer in-house credit cards, a feature that keeps shoppers coming back.

And then there’s the money issue. Newer anchors are bigger cash cows, paying higher rent than department stores, which have become so entrenched that they can demand low percentage-rent clauses, have long-term deals in place and operate older stores. Montgomery Ward’s, for example, was paying rents in the single digits. A brand new Target or Barnes & Noble can be brought in at a higher rent and with fewer concessions, landlords say.

No one tracks the exact amount of dark anchor space, but there’s plenty on hand to fuel the trend. Montgomery Ward’s closing in 2001 put 250 stores on the market, JCPenney shut 44 stores in its restructuring, and former power center staple Kmart is no longer an iconic draw. Regional chains, such as the Stern’s division of Federated Department Stores, have also disappeared. And in July, upscale Lord & Taylor said it will close 32 stores as part of a “strategic repositioning.”

Now, another blow to anchor space occupancy looms on the horizon, as department store and mall industry pioneer Sears intimates it may pull as many as 300 of its older, smaller stores out of regional malls in favor of larger freestanding stores that can compete on a selling space basis with the market-share grabbing supercenter concepts from Wal-Mart and Target. Specific plans to roll out the new concept, called Sears Grand, have yet to be announced. But they could seriously impact mall REITs such as CBL & Associates and General Growth, whose mall portfolios are 91 percent and 78 percent Sears-anchored, respectively. (see Traffic Patterns for more details)

In Lord & Taylor’s case, the vacancies are in premier locations, making them good acquisition candidates for other department stores like Federated and Nordstrom. But these days there’s a good chance that a darkened anchor pad won’t be filled by another department store. In fact, some analysts suggest Kohl’s, the traditionally off-mall discounter, as a candidate for some of the Lord & Taylor properties. But Kohl’s says anchoring malls isn’t part of its long-term strategy. Nonetheless, the retailer has become the go-to replacement for brokers looking to fill vacant Kmart anchor stores at power centers across the United States. Soon-to-close Sears anchors will be harder to replace, as many of them will be in older, B and C-class properties.

Since most department stores own their own sites, the impetus is on them to find another party to buy the store. But it behooves landlords to ensure the right tenant moves in, plus a mall’s existing anchors have veto power over new anchors, complicating the issue even further and making a new generation of mall anchors that don’t directly compete for market share with existing anchors even more necessary.

When anchor space needs to be filled, “The possibilities run the gamut from retailers like Best Buy all the way to restaurants and offices and institutional space,” notes L. Blaine McLellan, president of Surplus Real Estate, a disposition services company that is part of The Expert Cos. The empty Ward’s stores, notes Michaels, found a wide range of takers, including Bed Bath and Beyond, Linens N Things, Borders and movie theaters. Examples abound:

  • At General Growth Properties’ Stratford Square in Bloomingdale, Ill., Burlington Coat Factory moved into a two-level former Ward’s store. At General Growth’s newly acquired Lynnhaven Mall in Virginia Beach, Va., another Ward’s is being split by Barnes & Noble and Dick’s Sporting Goods.

  • At Oakbrook Center in Illinois, a space vacated by Saks Fifth Avenue has been taken by Federated for a Bloomingdale’s Home & Furniture store.

  • In Garden City, N.Y., Federated is splitting a shuttered Stern’s store at Simon’s Roosevelt Field Center into a 65,000-square-foot, two-level Bloomingdale’s Furniture and a 100,000-square-foot Galyan’s sports store.

Earlier this year, The Mills Corp. announced plans to target “interactive” concepts from companies such as ESPN, Crayola, Gibson Guitars and Bass Pro Shops to re-invigorate a batch of B-Class malls it purchased from Cadillac Fairview.

From High-End to High-Value

The biggest appetite for former anchor space has come from discounters. When Ward’s exited the malls owned by Simon Property Group, “Target was the big replacement, not traditional anchors,” notes Michael P. McCarty, Simon’s senior vice president of research and corporate communications RIGHT TITLE? “That says something pretty important—that Target, and I’d throw in Kohl’s too, are not exclusively off-mall.”

The arrival of discounters is significant because it indicates that department stores no longer object to them as co-anchors. “In the past they were kept out by department stores with approval rights,” says McCarty. “The department stores haven’t wanted to compete with them, though they said it was because they weren’t high-enough quality.”

The public’s clamor for value seems to have changed the equation. Now, McCarty says, “The industry has to get more creative. You won’t be able to just replace Ward’s with Federated or May Co. The world has changed, and conventional department stores finally got it. Consumers see the likes of Target and Kohl’s as being perfectly compatible.”

Space—specifically an excess of it—is something that needs to be addressed when department stores go away. “The sheer size of anchors, from 100,000 to 200,000 square feet, makes it an issue,” McLellan says. “There just aren’t that many retailers out there looking for those kinds of spaces, and once you start dividing it up it gets more challenging.”

That may mean different retailers on the first and second floors of a former department store, or partitioning a single-level store into three of four stand-alone spots. In one extreme example, General Properties took ownership of a Penney’s store at Honolulu’s Ala Moana Center and is converting it into 45 additional retail spaces, Michaels says.

The reconfiguring of former department stores is now a significant business for architects and contractors. MCG Architecture, a retail design specialist with eight U.S. offices, has been reworking spaces throughout the country to accommodate new multiple uses. “With the demise of Ward’s, we’ve got quite a few mall conversions going on in which we’re ripping them apart and rethinking them,” says Jeff Gill, the managing principle in MCG’s Irvine, Calif., office.

At Terra Vista Town Center in Rancho Cucamonga, Calif., a former Ward’s store was divided into space for a Michael’s, a Home Goods and two other specialty retailers. At some properties, Gill says, the intended use is an expanded food court.

“It has a lot to do with demographics and deciding what the best use is,” he says. The restructuring is not always easy. Exits need to be reconfigured, as do loading docks. Landscaping must change, and local governments may have a say when exteriors change. “When you break down tenant mass, the city wants you to create identity,” Gill says.

The easiest splits are those on one level, Gill says; two-level spaces can be tougher. In either case, the biggest expense usually is for ventilation and plumbing changes.

Because each project is different, it’s impossible to generalize about the cost of conversions, but it can be expensive. At Wyoming’s White Mountain Mall, a 341,000-square-foot regional owned by General Growth, Flaming Gorge Harley-Davidson spent $2 million to convert its half of a former Wal-Mart – an unusual anchor in its own right—into a showroom and retail center, says the dealership’s operations manager, Doug Fields.

Wal-Mart’s move to a new supercenter left the anchor space open for more than a year, Fields says. Flaming Gorge took 46,000 square feet of it and partitioned off the other half, which is getting an eight-screen cinema. The dealership uses about half the space for retail and accessories and the rest for sales and service.

“It’s really a different kind of retailing,” Fields says of selling motorcycles in a mall. So far it’s worked: Floor traffic is up, as are sales. “We’ve had a lot more pleasant surprises than unpleasant,” he says.

Some owners have resorted to wholesale changes in order not only to fill anchor space but to revitalize an entire property.

Ward Parkway Center in Kansas City began a demalling project in 2000 and eventually enticed Target to build on space once occupied by Ward’s. The owner at the time, Todd Interests of Dallas, also converted space that once included a Penney store into stores now occupied by Dick’s Sporting Goods, SteinMart and a 24 Hour Fitness gym. Todd Interests sold the 750,000-square-foot mall to Developers Diversified Realty of Cleveland this summer.

Ward Parkway Center is a good example of an owner that acted aggressively to secure new, non-department-store tenants, says McLellan of Surplus Real Estate, also based in Kansas City. “To attract other tenants like Dick’s and TJ Maxx, they had to demall part of it by creating outside entrances to a number of retailers,” he notes. The result mimics a lifestyle center.

Subdividing or reconfiguring space for retail is one thing, but doing it for offices and non-retail uses is quite another. “Mall owners certainly don’t want to sacrifice the synergy they get from having retailers in there, but in some cases having the revenue stream from an office or an institution is the best way to go,” McLellan says. That’s most often the case in B and C properties.

John C. Melaniphy, president of Melaniphy & Associates, a Chicago retail consulting firm, divides department store replacements into two camps: “Generative” ones that contribute to the health of the mall’s other retailers, and “space fillers”—usually non-retail—that contribute only a basic revenue source to the owner.

Among the non-retail possibilities are hotels, offices, medical facilities, government offices, health clubs and college campuses, Melaniphy notes. The latter, he says, can be helpful to other mall tenants by drawing large number of young people, who he says “patronize the hell out of the food court and some of the stores.”

In most cases, though, “Unless there’s a generative solution going into that anchor space, it is going to have an adverse effect on the mall. The landlord gets more rent, but small stores begin to decline and leave,” Melaniphy says.

For better quality malls, it won’t come to that. Indeed, the loss of department stores “almost always turn out being positive for the landlord in terms of incremental revenue,” says Simon’s McCarty. “You’re taking space that was paying a nominal amount per square foot and most times quadrupling the rent. With Wards, and we had more of them than anyone else, we made money disposing of the leases and replacing them with May Co. stores.

“I would emphasize the often-overlooked fact that if you look at the industry experience in recycling these boxes, the outcome is resoundingly in favor of the owners,” he says. “As for Ward’s, the day they shut their doors was a non-event—a blessing for the owners who could finally get rid of them.”