Welcome to Part 4 in our series on multi-family conversions.

In this post, we look at converting space in vacant or struggling shopping malls into apartments—an idea that had taken root before the pandemic but was accelerated by it—including an analysis of the current state of US malls and the pros and cons of mall to apartment conversions for mall owners, developers and prospective apartment tenants.

Retail to Multi-Family Conversions

As with other types of properties, the pandemic has helped fuel an increase in retail to multi-family conversions. Many malls and specialty retailers were already struggling due to the ongoing shift from traditional brick and mortar stores to online shopping, as well as other changes in consumers’ shopping habits. So were established department stores like Macy’s and big box retailers like Sears, traditional mall anchor tenants that drew shoppers, attracted other tenants and helped keep malls profitable for owners.

Stung By The Pandemic

Then, the pandemic struck in early 2020. The shift to ecommerce accelerated; US Census Bureau figures show that total ecommerce sales were $612.9 billion during the first three quarters of 2021, a 16% increase from 202042.

Curbside pickup and home delivery grew in popularity, and the lockdowns, mandates, health and safety protocols and other measures meant to curb the pandemic, as well as the fear of being in a public place and catching Covid, reduced foot traffic and in-person shopping even further. For many struggling retail properties that were already on life support, it was a death blow. According to market and consumer data provider Statista, the vacancy rate for US retail properties averaged 4.9% in 2020 and 202143.

Shopping Malls

In August 2020, Coresight Research ominously predicted that 25% of the roughly 1,000 malls in the US will close over the next three to five years44. Class B, C and D malls are most at risk of closing45. In a sign that dire prediction may not be far off, in April 2022, Paris-based Unibail-Rodamco-Westfield, parent company of US mall operator Westfield, announced its intentions to exit the US market entirely by 2023.

For mall owners, operators, developers, investors and lenders, the question then becomes what to do with all that vacant or soon to be vacant retail space and those empty parking lots, and how to resuscitate their once thriving assets. One alluring answer is converting space in and around shopping malls to residences.

An Idea Whose Time Has Come

The idea has been picking up steam. As of late January 2022, at least 192 US malls were planning on adding housing46, and about 33 malls had added apartments since the start of the pandemic47. In October 2020, Barclay’s predicted that 15%- 17% of US malls will need to be redeveloped into other uses for the long-term48.

For anxious mall owners, adding a residential component can be an effective way to revitalize a struggling mall and generate higher returns from it, especially with demand for apartments being strong due the housing shortfall and rising home prices.

The Best of Both Worlds

It can also be a best of both worlds scenario; generally, only parts of the mall or its parking lots are converted to multi-family space. So, the higher visibility and better performing sections of the mall can remain retail space to attract and retain strong tenants and continue generating rents, while the underperforming sections can be converted to housing to generate new revenue.

The concept of adaptive reuse to multi-family also dovetails with the growing trend of converting struggling malls to de-facto community centers, where people can gather, socialize, shop, eat and be entertained.

New Types of Retail Tenants

In addition, adding apartments to malls opens the door to bringing in new types of retailers whose services residents need, like grocery stores, pharmacies and healthcare clinics. It becomes a win-win for mall owners: being located so close to essential services increases the apartments’ appeal; being located so near hundreds of apartment dwellers who need their products and services increases the mall’s appeal to prospective retail tenants.

Other Types of Retail Mall Conversions

In addition to apartments and condominiums, mall owners have been adding hotels and offices to their properties, and bringing in non-traditional tenants like ecommerce fulfillment centers, medical offices and even schools to boost sagging revenues.

Appealing to Renters

For renters, living in or adjacent to a shopping mall is appealing for several reasons. The most obvious is living in such close proximity to shopping, dining, entertainment, gyms and the other services offered by the mall, which essentially become amenities to the apartment building. It’s akin to the live/work/play dynamic that fueled demand for apartments in urban neighborhoods before the pandemic and is increasing demand again. Because many malls are centrally located, residential tenants are close to businesses and services outside the mall as well.

Another reason mall apartments appeal to renters is transportation. Shopping malls tend to be located at major intersections, providing easy egress to main roads to tenants. In addition, many malls are on public transit routes, giving apartment dwellers convenient access to public transportation.

And, with malls’ expansive parking lots and garages, parking is rarely an issue for apartment tenants.

The Downsides of Mall Living

Living in an apartment in or adjacent to a shopping mall can also have its downsides. Malls can be loud and noisy; they get crowded at times, especially during the holidays; traffic in and around malls can be heavy. And, the parking lots, signs, storefronts and surrounding roads are brightly lit at night, potentially disrupting tenants’ sleep.

The Downsides For Developers

While converting part of a moribund mall to apartments or another use can pay dividends, converting the entire property can severely backfire, say some experts. Barclays predicts that converting an entire mall into a residential complex or e-commerce warehouse could ultimately reduce the property’s value by 60%-90%49, a staggering drop. Barclay’s research indicates that redeveloping a mall to a mixed-use property is a much better strategy for recovering the property’s value.

Additional Challenges of Converting Malls to Apartments

Other challenges mall owners need to consider are:

  • Zoning: Oftentimes, the land malls are on is not zoned for residential use, so the owner and developer will have to apply to have the site re-zoned. This can be very time-consuming and costly. In addition, there’s no guarantee the local planning and zoning board and local government leaders will approve the zoning change.
  • Site Plan: Likewise, the site plan for the reconfigured mall must be approved by the local governmental authorities. This too can be a lengthy and time-consuming process, and the owner and developer may need to revise the plan before it is approved, which would add to the time and expense of the project. Significant changes might reduce the profitability of the project or even make it financially unfeasible.
  • Capital Requirements: In addition to construction and leasing costs, adaptive reuse of shopping malls often requires the demolition of existing structures, which is very expensive and drives up the amount of capital required for the project.
  • Existing Tenants: Many malls targeted for adaptive reuse are still partially occupied by tenants with time left on their leases. Noise, traffic, dust and disruptions from demolition will likely hurt their business; some tenants may be located in a portion of the mall that’s going to be converted. Consequently, the mall’s owner needs to figure out what to do with any retail tenants who might be adversely impacted by the conversion.
  • Differences Between Retail and Multi-Family: While there are some similarities between the two property sectors, they’re also very different in many ways and have very different dynamics. Multi-family generally involves more tenants with shorter leases than retail, and apartment tenants tend to be more transient, with higher turnover. Also, retail leases and leasing tend to be more complicated than multi-family leases and leasing. For that reason, it’s best mall owners looking to add apartments to a property partner with someone with multi-family expertise, if they don’t already have that expertise within their organization.
  • Multiple Owners: Sometimes, different sections of a mall have different owners. The core retail area may have one owner; a big box anchor tenant, like a department store, may own its own space; the parking areas may be owned by a third company; the out lots may be owned by a different party or parties altogether. In these mixed ownership scenarios, any plans to convert part of the mall to apartments will need to be approved by and coordinated between all parties involved, as specified in everyone’s legal agreements, which can complicate the project significantly and add to its length and cost.

 Next, Chapter 5: Department Stores and Other Types of Multi-Family Conversions

Next, the fifth and final chapter in our series on multi-family conversions. In this post, we’ll look at how old department stores and other types of vacant and obsolete properties are being repurposed into new apartments.

In case you missed the previous posts in our series, the topics we covered were:

About The Author

Terry Banike is Realogic’s marketing manager. Over the course of his career, he has worked in marketing, communications, journalism and public relations, and has written numerous news stories and feature articles for newspapers, trade publications, newsletters and blogs. A rabid reader of anything and everything on commercial real estate, Terry closely follows commercial real estate news and trends and frequently posts about real estate on the Realogic Blog. He can be reached at tbanike@realogicinc.com.

42,46,47-The Orange County Register; Malls adding apartments to offset dwindling numbers of shoppers; January 25, 2022
43-Statista.com; Retail vacancy rates in the United States from 2019 to 2021 and forecast for 2022; January 11, 2022
44, 45- CNBC; 25% of US malls are expected to shut within 5 years; Giving them a new life won’t be easy; August 27, 2020
48,49-CNBC; The Path Forward; Turning a dead mall into a warehouse will slash its value as much as 90%, Barclays predicts; Thursday, October 15, 2020