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What does the future hold for Pennsylvania’s dying malls?

Published September 23. 2018 06:10AM

CARLISLE (AP) — Outside The Bon-Ton, a clerk in a blousy Oxford shirt and dark gray slacks takes a few last drags of his cigarette on the second-to-last day he’ll serve customers here.

He nods wordlessly as patrons walk by on their way to the slim pickings inside.

“Take 95 percent off,” reads one sign, above a rack of women’s sweaters. “Was $44.00. You pay $2.20.”

The Bon-Ton is among the final holdouts of The Point at Carlisle Plaza, built in 1964 amid a nationwide retail boom that drew commerce away from downtowns and closer to a rising suburban middle class.

But retail is a fickle business subject to the whims of demographics, the economy and popular taste. Over the past two decades, the once-bustling mall shed one anchor, Kmart, and then another, JCPenney, and finally The Bon-Ton, too.

Department stores shed some 500,000 jobs since 2002, according to the U.S. Bureau of Labor Statistics. The closing of Bon-Ton stores, like this one in Carlisle, will add about 2,225 to that tally. (Wallace McKelvey photo)

On this rainy Saturday, all that remains of the failing department store are a smattering of clothes racks near the entrance and a meager selection of perfume in lighted cabinets. At the far end of the store, a clique of naked mannequins looks out across thousands of square feet of beige carpet.

The rest of the mall, part of which was demolished to make way for a Lowe’s, is largely vacant. At the nail salon, stylists busily buff and polish. An elderly couple laps the empty storefronts. A clerk at GNC smiles and waves them in; the woman smiles back and politely declines.

“When you see a mall and wonder ‘Why did they build one here?’, it’s because back then it was a big deal,” said Greg Maloney, who developed countless malls during the boom years of the ‘80s and ‘90s. “It was a town hall. They had events there — car shows, boat shows. It’s where everyone went for Christmas and holidays.”

Maloney, retail CEO of Jones Lang LaSalle, remembers a time when malls had the run of the retail business and big department stores like Sears and JCPenney dictated where those malls were built. They were the Walmarts of their time, he said, because shoppers had few alternatives.

“When Sears wanted to go into Harrisburg,” he said, “first a developer would find a site where Sears wanted to go and then a mall was built around Sears.”

Malls sprang up around the country in urban, suburban and even more rural outposts like Carlisle, Pottstown and Warren County. They opened with just 60 percent of the storefronts occupied but those vacancies tended to fill up quickly.

Sears and some of the other anchors owned the land on which their stores were located. Smaller businesses, however, had little say over rent or lease terms. They were just happy to carve out a niche among the retail giants.

The calls would roll in, Maloney said, and there was no negotiation.

“The developer had all the leverage,” Maloney said. “That’s why there were so many built so quickly.”

Then came the big-box stores--the Best Buys, the Home Depots, the IKEAs--that focused on a specific segment of the old department stores--electronics, hardware, home goods. They offered shoppers a wider selection at lower prices, cutting into a market that was once the exclusive domain of department stores. Discounters like Walmart and wholesalers like Costco, meanwhile, went after families and lower-income customers. Finally, online retailers created virtual department stores with slim profit margins. Amazon, with its streaming video and food delivery services, went a step further by replicating key functions malls used to perform.

All this new competition was good for consumers but bad for the department stores, the malls they anchored and the people they employed. Department stores shed some 500,000 jobs since 2002, according to the U.S. Bureau of Labor Statistics, while online retailers created a scant 200,000. Credit Suisse, the multinational investment bank, estimated that about a quarter of America’s roughly 1,100 malls are now in danger of closing.

Not every mall is dying, of course.

The King of Prussia Mall in Montgomery County is the second largest nationwide due in part to local demographics--affluent, middle- to upper class families in the Philadelphia suburbs--and a $150 million expansion to retrofit the mall with walkable, outdoor areas, high-end boutiques and a variety of dining options beyond pizza and pretzels. More renovations are expected to be completed in 2019.

Closer to home, York’s West Manchester Mall found new life through a process called “demalling.”

Texas-based developer Tony Ruggeri is quick to correct anyone who mistakenly calls the 742,000-square-foot complex a mall. It’s a “town center” now.

“I joke about it but rebranding these redevelopments is very important,” he said. “You don’t want the perception that you’ve just put some cosmetic change on it but it’s really the same thing it was before.”

In West Manchester’s case, developers literally turned the mall inside out, demolishing the atrium and giving each store a front entrance. An outdoor plaza allows shoppers to stroll from one business to the next, including a newly opened Gander Outdoors and a forthcoming Hobby Lobby. Elsewhere, restaurants break up what was once a vast, empty parking lot.

“Most larger tenants want that outside exposure and facade,” Ruggeri said. “They want drive-by traffic to see their sign on the building and people are used to driving up to a store, walking in, getting what they want and leaving.”

One of the first things Ruggeri looks for when choosing a mall redevelopment project is demographics. In York, most of the existing retail shopping centers were on the east side of town. But there were few options for residents on the west side of town or in nearby communities like Hanover.

“We’ve already seen the transition,” said David Black, president and CEO of the Harrisburg Regional Chamber and Capital Region Economic Development Corporation. “One thing to remember about malls: There’s a lot of land with a mall. There’s a lot of space that can be repurposed.

As with West Manchester, the former Camp Hill Mall off Trindle Road jettisoned its traditional atrium in favor of a shopping center format. Boscov’s anchors one end and a Giant grocery store took over from Montgomery Ward. A Panera Bread and an additional bank branch occupy new outbuildings. In Lancaster, The Shoppes at Belmont followed a similar playbook, combining Whole Foods and an array of restaurants with plans for a mixed-use residential development.

Harrisburg Mall clawed its way back from the brink by adding more street-facing storefronts and an unconventional anchor, a Bass Pro Shop. Six months after Sears pulled out of the Capital City Mall, it was replaced by a Dick’s Sporting Goods, one of the many big box stores that outcompeted the old department stores. The same mall is adding a Dave & Buster’s, the kind entertainment-based tenant malls are increasingly turning to.

“Owners of these properties are finding ways to be more creative,” Black said. “One thing going for them is they’re in a strategic location with a lot of traffic going by. They will be repurposed.”

The problem with dying malls, Ruggeri said, isn’t so much the malls themselves. The root of the problem is the dying department store. As anchors like The Bon-Ton, JCPenney and Sears close shop, they leave behind massive vacant storefronts that are difficult to find tenants to fill.

“There are shopping centers all across the country that are overbuilt,” he said. “They’re too large and don’t fit the market anymore.”

West Manchester demanded a complete rethinking of the complex’s layout and extensive demolition.

Another property Ruggeri redeveloped, Nashville’s 100 Oaks Mall, became home to an expanding Vanderbilt University Medical Center. Patients stroll a much smaller retail footprint with a beeper as they wait to be seen by their doctor. Health and wellness is a growing sector that’s hungry for retail space. One example closer to home: the York Galleria Mall added a Gold’s Gym.

In New Jersey, the old Echelon Mall became the municipal offices of Voorhees Township, with new residential and retail spaces built around the original property. In Kentucky, the Southland Christian Church transformed the old Lexington Mall into an auditorium, church offices and school. Elsewhere, community colleges, DMVs and museums have come to occupy large swaths of dying malls.

Spencer Levy, head of research for the Americas at the commercial real estate brokerage CBRE, said one of the keys to resuscitating a dying mall is so-called experiential retailers like microbreweries, movie theaters and restaurants.

“These are places people have to go to get the services they’re looking for,” he said, “not goods retail that can be disrupted more with the Internet.”

One local example of this is the Plymouth Meeting Mall in Montgomery County, which added a Dave & Busters and LegoLand Discovery Center in recent years. The same complex is also home to a multiplex and a Whole Foods grocery store.

Office space is another reliable long-term solution for the dying mall, as was the case with Nashville’s 100 Oaks Mall. And those offices can help lift the local economy as a whole, Levy said, because office jobs drive demand for apartments and other services.

With the right mix of tenants, he said, most malls can be redeveloped. But there are also malls whose most valuable asset is the land--not the buildings themselves.

Levy used Michigan’s Pontiac Superdome as an example: The stadium was built in the early ‘70s for the equivalent of more than $300 million and sold at auction in 2009 for the paltry sum of $550,000. Why? It cost the owners some $2 million per year in maintenance and operating costs.

“The problem is there are white elephants that are very expensive to maintain irrespective of how many tenants are in there,” he said. “All those maintenance costs fall on the landlord.”

From the outside, it may appear wasteful to demolish so much commercial space only to rebuild it as big box stores and outdoor shopping plazas. But demographics, the condition of the existing building or local construction and zoning codes may make it nearly impossible to redevelop the property without demolition.

“Sometimes, it’s cheaper to build from the ground up than (try to do) adaptive reuse,” Levy said.

Furthermore, Maloney said, lenders are often afraid to invest in B- and C-level shopping centers in less than ideal locations. There’s a level of risk involved in any redevelopment, he said, and that can scare away financial backers.

“Until they understand there’s value that can be created,” he said, “it’s going continue to look bad for these areas and, at some point, they’ll be bulldozed because the land value is greater than the building.”

Ruggeri, a veteran of mall redevelopment projects, said they’re not for the faint of heart. When he invested in Nashville’s 100 Oaks Mall, for example, he had a fairly good idea that the local population could support it. Success, however, was not guaranteed.

“At some point, you’re at the end of the diving board and you just have to jump and hope there’s water down there,” he said.

Such projects often need the support of local government to succeed, Ruggeri said.

That could mean local code enforcement, planning and zoning offices that work smoothly and efficiently with state permitting agencies. It could also mean tax credits and local payments in lieu of taxes to drum up interest to a property that could otherwise prove too risky to be redeveloped using wholly private funding.

While real estate developers have a vested interest in the continued survival of brick-and-mortar retail, there are legitimate reasons for optimism.

The Point at Carlisle Plaza’s future, for example, isn’t necessarily as bleak as it appears.

Earlier this year, the operators of Parx Casino included the mall on a shortlist of sites for a mini-casino. It could have filled 42,000 square feet of retail space with between 300 and 750 slot machines and up to 30 table games.

Carlisle’s Borough Council ultimately nixed the plan amid vocal opposition from residents worried about the impact casino gambling would have on their community. The developers pitched Parx to neighboring South Middleton Township but local officials rejected it.

At the very least, the recent flurry of activity around The Point shows that struggling properties can still draw major tenants--even if the larger community doesn’t approve of them.

And while a number of malls are struggling, the larger retail market is not.

According to U.S. Census data, total retail and food sales for the first four months of 2018 were 4.7 percent higher than the same period in 2017. Internet retailers represented just 9.5 percent of all retail sales.

The market was bolstered, in part, by a proliferation of niche and high-end retailers in the last two decades, particularly in so-called “fast fashion” and home goods. Whereas Baby Boomers saw the same item for months at JCPenney or Sears, Millennials grew accustomed to finding something new every time they went to their favorite store.

Sears, in an effort to bolster its finances, spun its real estate holdings off into a separate company, Seritage, which leased the properties back to Kmart and Sears. Amid wave upon wave of store closings, Seritage has tried to redevelop those properties to draw new higher-end tenants like Nordstrom and Pottery Barn.

Brick-and-mortar stores have increasingly extended their brands online. Walmart, for example, saw its online sales increase 44 percent to $11.5 billion last year--representing 3 percent of all ecommerce nationwide. That’s still a paltry sum compared to Amazon’s $199 billion in online sales over the same period--good enough for a 44 percent market share, according to the ecommerce analytics company One Click Retail.

Online retailers like Amazon, Bonobos and Untuckit, meanwhile, have all announced plans to open brick-and-mortar locations, effectively returning to a business model they helped disrupt. Amazon opened its first brick-and-mortar grocery store, Amazon Go, in January in Seattle. The store doesn’t employ cashiers--those jobs are automated--in yet another bad omen for the estimated 3.4 million Americans who currently work such jobs.

Maloney said the rapidly changing retail environment makes today the most exciting time to work in his field. And today’s top retailers are just as likely to falter tomorrow if they don’t adapt to those changes, he said.

“If you’re No. 1, everyone’s shooting for you the next year,” he said. “It’ll be hard for Walmart to maintain unless they continue to adapt. If they ever get to feeling they’re invincible, like Sears or JCPenney’s, their fate will be the same.”

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Online:

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Information from: Pennlive.com, http://www.pennlive.com

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