Why Enclosed Mall Turnarounds Fail
Why Many Enclosed Mall Turnarounds Fail
Recently we (TKO) received a call requesting a proposal for
leasing a "turnaround" for a mall of a million sq.ft. that is
65% vacant. Turnarounds like this are extremely difficult, and
often the buyers of these centers have no idea what they are
doing, but because they acquired the project for $10 psf or
less, they think they're getting a bargain (which they never
are). So before going into our services and costs, I asked some
questions on what its owner thought could be done, what type of
money he had for TI, how long the owner anticipated waiting
before seeing results, etc. (why waste both of our time if we
can't do the job) The good news was that the new owner recently
did a Steve&Barry's deal, which in my opinion makes sense, since
they're so unique that they'll draw from a larger radius than a
typical JCPenneys, Sears, Wal*Mart, etc. So our conversation
started off on the right track. (Oh, the center can't be
demalled).
The owner also built into his proforma a substantial TI budget;
is prepared to do "sweetheart" deals and wait 18 months before
seeing any real results. A rare and knowledgeable buyer of
distressed enclosed malls compared to most I meet. Our
conversations went well, but there were two areas I disagreed
with him on. First, when we take over a center of this size with
problems we want to also manage it, not for the money (you never
make real money off managing) but because it provides us with
the degree of control we need to make a turnaround work. The
owner felt that currently the amount of tenants in the center is
small enough where he could manage it until the project begins
to lease. Yes, he's right, it's small enough for him to manage
as a one-man show BUT you have to treat a turnaround not only as
a leasing situation but also have to "turn" the marketing and
management around at the same time so not only are new tenants
being solicited but the few existing retailers are kept somewhat
happy. And keeping existing tenants happy and getting new ones
interested means that there has to be traffic in the center and
centers with this low of vacancy usually have no traffic to
speak of, which is why the center is in trouble (Which came
first, the chicken or the egg?).
I've written this before but I'll say it again, traditional
advertising doesn't work for a "C" or lower center. You have to
do "event marketing" in order to have an impact. Event marketing
means having traffic-generating events that bring people in for
that specific show but then hopefully they shop the rest of the
center. In traditional advertising, you promote the center, the
consumer comes, but if the center has few retailers, the shopper
is disappointed because of the lack of merchants and they never
return (you only have one chance to make a first impression).
We've promoted gun shows, arcade auctions, book events, etc,
sometimes bringing in as many as 25,000 consumers over a
weekend. We gave space for free to hold comedy clubs on
alternate Fridays and allowed Yoga teachers use of stores during
the week to help increase traffic. All our food and many of the
other stores benefit from this increased traffic. They did
enough volume to keep the existing retailer's spirits "up."
That's why marketing goes hand in hand with leasing.
We also want to have enough control that we can minimize the
number of retailers closing every month, and in a problem center
there's always a high turnaround. I'm a great believer in
temporary tenants, but they have an extremely high failure rate
since most are startups with limited capital and with no
walk-bye traffic, they usually fail. Therefore, you have to be
extremely selective on who/what you put into the center. Also,
we've learned that we have to keep cash flow as high as possible
or at least keep the losses low, which means working hard on
lowering CAM costs. Anyway, that's why we "need" the management.
The next point I disagreed on is that the buyer put together an
elaborate and well-documented report on every mall-oriented
retailer operating within 20 miles of his project. You could
tell there was a lot of time and effort researching this info,
BUT I'm not sure how useful it is. The center itself is over 20
years old and there's no doubt in my mind that 99% of all the
mall-oriented retailers within 50 miles knows of the project and
has a negative view of the center's future. Yes, there are many
mall-oriented retailers I'd love to have and some of 'em might
be willing to be "bought" in order to entice them in, but
besides requiring lot's of TI money and kickouts I don't think
they would have an immediate impact on traffic because they are
in every mall.(there are three competing malls within 15 miles).
Anyway, the new buyer asked that I put together a proposal and
list of tenants I'd go after and that got me thinking of my
"dream team of mall tenants" and guess what, most are not
mall-oriented. I want tenants that build traffic and draw on
their own, not needing their neighbors traffic to survive, at
least at the beginning. Rent considerations were secondary,
since the center was bought "right," so we could make it work.
So here's the type of retailers I'd want to start a turnaround
with: (not in any order of importance) Five Below (if I couldn't
get them, then Dollar Tree), MJM Shoes or DSW would be excellent
draws; While I'd love a Barnes & Noble or Borders, realistically
I can probably do a Book Warehouse or Books-A-Million deal.
Stein Mart would also be an excellent draw, as would Guitar
City. Add to the list Children's Place, Ann Taylor Loft, Radio
Shack, Causal Male, Dress Barn, Fashion Barn, Mandees,
HomeGoods, Sleepy's, Verizon and in a rear, outside location,
the Post Office (a great draw from 9-to-5), Hancock
Fabrics/JoAnn's, David's Bridal, Cato Fashion, Deb Shops, K&G
Men's Center, Hobby Lobby, Party City, Shoe Carnival, Famous
Brand Shoes, Petland, Wood Workers Warehouse, Sally Beauty,
Dot's, Eastern Mountain Sports and I could go on and on. As far
as food, I'd want a 10,000 sq.ft. Chinese restaurant or Old Time
Buffet, they'll cater to my immediate customers and are in the
right price points. I can afford to do a deal with the Chinese
restaurant, but can't afford a "Friday's" deal. I'd also want a
large and well merchandised nursery somewhere on the outside of
the property.
What I chose are both strip and mall tenants (in today's world,
most retailers are bi-center...(the political correct way of
saying it. Ann corrected me; they go either way) and few of the
retailers I mentioned are high rent payers. I picked the
retailer based on tenant mix and their ability to draw customers
into the center on their own. Neither JoAnn Fabrics nor Hancock
are high-volume retailers, but they are "unique," not usually
found at every street corner and command a high degree of
loyalty from their customers. All are destination-oriented
tenants, which in the long run will strengthen the entire
center. Few of these retailers are considered "trophy" tenants,
but they can all do a lot of good for the right center.
Non-category killers, such as a Petland, are good traffic
builders for a center. Parents bring in their children to show
the "mini-zoo" to their children and animal lovers of all types
can't resist the cute rabbits in the front window. The buzz word
of our industry today is Lifestyle Centers, but isn't a pet shop
part of a "lifestyle," as is a fabric store or hobby shop or a
"Guitar City," a well-merchandised nursery definitely adds to my
center's "lifestyle" and we've dont it on the "cheap." Maybe
they're not all high end merchants but they bring in a dedicated
customer willing to spend time and money.
Now in all probability, we won't get the account since I'm
taking an unorthodox approach, and all owners would rather hear
that we're going after the Limited instead of Dots. And in the
perfect world I agree, but we don't live in a perfect world.
First, the Limited builds-out costs a fortune and second they
are already in every mall within 10 miles. So, while we are
making it more convenient for some customers to come to "our"
center, the drawing power is probably limited to three miles,
while a "Guitar City" will draw customers from a larger radius.
Problem centers can't compete with their successful neighbors,
they have to complement and that's why leasing and marketing
have to take a non-traditional approach.