Mall Anchor Industrial Conversions Are Generating Interest But Likely To Remain A Niche Trend

As the coronavirus pandemic continues to disrupt traditional retail models and e-commerce demand continues to soar, investors and developers are becoming increasingly interested in the future of struggling or dead shopping malls.

The national conversation has turned to whether those malls can be converted into effective last-mile distribution facilities. The proximity of those malls to rooftops is alluring, but not all are suitable for adaptive reuse.

“Probably one in 10 or one in 20 of these malls are ready for an [e-commerce] deal,” Powers Brown Architecture principal Nazir Khalfe said during a Bisnow webinar Aug. 26. “A lot of the others will be land plays, or they will be left derelict.”

The pandemic prompted Powers Brown to conduct extensive applied research over the past six months to figure out what mall locations and layouts are the best candidates for conversion.

Depending on the market and the quality of the mall, Powers Brown found that a developer could save as much as $20 per SF and a minimum of four months of construction time by doing adaptive reuse instead of building last-mile facilities from scratch, Khalfe said.

Mall conversions are a difficult and niche undertaking, according to Prologis Global Head of Research Chris Caton. There are about 1,250 malls across the country. Of those, about a third fall within the top 30 markets, which equals about 350 Class-A and Class-B malls.

Caton estimated that those 350 malls contain about 1,000 anchor tenants, and the question then becomes what limited percentage of those could be realistic candidates for logistics development.

If 75 out of 1,000 anchors were candidates, each supporting about 100K SF, it would only amount to about 7.5M SF of anchor development over the next decade. In comparison, the U.S. industrial market averages between 200M SF and 250M SF of new development each year.

“I think, for sure, less than 1% of supply over the next decade is going to be these anchor-scrape exercises,” Caton said.

Khalfe said cold storage could be a fitting reuse for an anchor space or built as an attachment to a mall, as those facilities usually average around 100K SF to 150K SF, and don’t typically require as many dock doors as a regular logistics development.

“There’s no reason why there couldn’t be a portion of the mall that could be carved out on the parking area adjacent to the mall,” Khalfe said. “The 100K SF to 200K SF footprint fits really well with the majority of the malls we’ve been looking at in our matrix.”