Retail REIT Executive: Most Failed Malls Will Languish

By Kris Hudson

Many cities saddled with a dying mall envision rebuilding the eyesore as a multilevel, mixed-use complex with vibrant stores, offices and condominiums.

Most of those cities are dreaming, and the harsh reality is that their derelict retail properties likely will linger and deteriorate for many more years, according to Don Wood, president and chief executive of shopping center owner Federal Realty Investment Trust.

Mr. Wood oversees a real-estate investment trust that owns 85 shopping centers totaling 19 million square feet in major U.S. cities. Yet, he told an audience at the National Association of Real Estate Editors annual conference on Wednesday that he considers the U.S. to be overbuilt with retail properties.

There is too much retail supply in this country, and that will affect values and redevelopment and whether or not something gets torn down, Mr. Wood said in a 50-minute address at the Denver conference.

Thats a concern as the U.S. faces the likely failure of many retail properties in the coming years due to the ongoing rise of online shopping and store closures by one-time stalwarts such as Best Buy and Abercrombie & Fitch. Green Street Advisors, an analysis firm that tracks REITs, has forecast that 10% of the roughly 1,000 large malls in the U.S. will fail within the next 10 years and be converted into something with far less retail. Thats a conservative estimate; many mall CEOs predict that the attrition rate will be higher.

U.S. retail vacancy rates continue to decline from their recent heights, partly due to the dearth of new retail construction after decades of overbuilding. Retail vacancy in the top 54 U.S. markets was 7.3% in this years first quarter, down from a high of 7.9% in the first quarter of 2010, according to real-estate research company CoStar Group. Retail space now amounts to 50.2 square feet per capita in the top 54 U.S. markets, CoStar says.

With the specter of more ghost malls looming, municipal leaders often draft plans to replace their failing mall with dense, mixed-use projects intended to serve as new city centers. The trouble is, many markets lack the key elements needed to support such a project, Mr. Wood said. He should know, since Federal Realtys main specialty is redeveloping urban shopping centers into mixed-use projects such as the REITs Bethesda Row in Bethesda, Md., and Santana Row in San Jose, Calif.

First and most important, mixed-use projects require a much higher population density and household income than typically are found in the markets surrounding a failed mall. Second, building such dense projects is highly expensive due to underground parking and multiple floors above grade. Third, not all developers are savvy enough to coordinate construction of divergent real estate such as retail, residential, office and hotel.

Fourth, such mixed-use projects are so expensive that the local municipality often must provide some type of financial assistance, which some cant readily do.

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Retail REIT Executive: Most Failed Malls Will Languish