At AMI Lenders, we are primarily interested in what is happening in Houston, TX, and its surroundings. However, that does not mean we ignore what happens elsewhere in the country. During the first days of March, we read an interesting text (“Remember the mall?”) in a newsletter, which is mailed daily to one of us by the Los Angeles Times. In the said newsletter, author Ryan Fonseca talks about what is happening with malls in Southern California (and broadly elsewhere in the country). The article by Mr. Fonseca ties in nicely with what we posted in mid-2022 about trends in commercial real estate (link here) and, particularly, retrofitting Class B and C malls, even though some of the California cases discussed happen to be retrofitting of Class A malls. So, let’s delve further into the topic.
What is causing Californian malls to be retrofitted?
Mr. Fonseca writes about a set of factors prompting this evolution of malls into something else: (1) decades of declining foot traffic, (2) declining foot traffic worsened by a gut punch brought about the Covid-19 from which many retailers haven’t been able to recover, the previous two compounded by (3) Southern California’s ongoing housing shortage. In this maelstrom, empty or half-empty Californian malls are being eyed for housing mixed with office and retail spaces.
Some examples of retrofitted malls in Southern California include:
- The Laguna Hills Mall, where work is underway to build up to 1,500 apartments, a hotel, office space, green space, and new retail stores.
- The city of Westminster has plans to reshape its local mall to include up to 3,000 residential units and 425 hotel rooms, plus 17 acres of surrounding green space.
Is this a nationwide trend?
Mr. Fonseca cites a recent report from the Urban Land Institute and National Multifamily Housing Council Research Foundation, funded by pro-development organizations, which supports the idea that mall retrofitting could catch on nationwide “as developers indicate a desire to capitalize on converting commercial space to housing.” The cited report conveys national estimates of up to “1 billion square feet of surplus and obsolete retail space.”
The Urban Land Institute report issued some exciting conclusions (we quote):
- “Broadly, and perhaps self-evidently, it is clear from our interviewees that conversions can be financially feasible in a broad range of markets, original uses, building conditions, and circumstances.”
- “Occupancy at acquisition is not necessarily an impediment and … complete vacancy is not an absolute requirement.”
- The interviewees “experienced little, if any, challenges to financing. Generally, they describe their financing experience as essentially easy….”
- “The ability to convert obsolete structures could go far in adding to our housing stock and, at the same time, add value to communities through such revitalization.”
Shopping mall retrofitting was proposed in San Antonio.
Closer to home, the City of San Antonio has an interesting plan underway, deftly titled “SA Tomorrow,” which you can read on their Internet page.  SA Tomorrow is a comprehensive urban development plan. The City of San Antonio Department of Planning’s official, long-range planning document provides policy guidance for future growth, development, land use, infrastructure, and services.
On their Internet site, you can read about their proposed plans for Shopping Mall Retrofit.  They propose that “adaptive reuse of large shopping mall spaces can help activate the available indoor spaces and the surrounding neighborhoods.” Similar planning documents have appeared in other parts of the US. For example, Boston’s Metropolitan Area Planning Council recently published its report “Rethinking the Retail Strip.” 
Interestingly, Mr. Fonseca concludes the text that prompted us to write this blog post by noting that some retrofits will surely face local backlash (the typical No In My Backyard mindset). We hope not.
As you can see, retrofitting Class B and C malls is a commercial real-estate trend taking shape across US suburban areas. It can solve pressing land use and housing problems while improving neighborhoods and the financial returns to the mall’s owners. The above said, we believe that Houston area real-estate investors should be looking into existing shopping mall retrofit opportunities and consulting with AMI Lenders for potential hard money financing schemes.
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 Essential California Newsletter (by the Los Angeles Times), March 2, 2023.
 Behind the Façade. The Feasibility of Converting Commercial Real Estate to Multifamily. https://knowledge.uli.org/-/media/files/research-reports/2023/behind-the-facade_conversion-report.pdf?rev=93f81cc8c9dc44b395da065a300c383e&hash=F7F7C5EFA7173F36A0B49FD0B2E4F3C5&utm_id=88469&sfmc_id=287397