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‘LOT’ OF OPTIONS

Mall parking lots are too valuable for landlords to waste on cars

By Joel Groover

The mall parking lot has been likened to a “sea of asphalt.” But as suburbs fill up with office towers, luxury condos and high-rise hotels, mall owners have started seeing their parking lots in these markets not as seas, but as islands of underused flatland begging to go vertical.

“If you look at the shopping centers that were built over the last 50 years, many of them were built in what would be called greenfields,” said Thomas J. D’Alesandro IV, senior vice president of development and redevelopment at General Growth Properties. “Now they are in-fill. And like any urban area, they are subject to higher and better uses than just a one- or two-story mall surrounded by surface parking.”

After a frenzied “age of acquisitions” that has lasted for over a decade, mall REITs are waking up to the tantalizing value of the asphalt-covered acreage within their own portfolios, says David C. Scholl, senior vice president of development at Westcor (a subsidiary of The Macerich Co.). Many are drawing up plans to rip up their parking lots and replace them with office towers, apartment buildings, hotels, service retail and other moneymakers. “There is a lot of pent-up opportunity,” Scholl said.

Surface parking and its attendant ring roads and landscaping consume about 75 percent of the overall site of a typical regional mall, says Stan Laegreid, a principal at Seattle-based Callison Architecture, which has drawn up higher-density solutions for Phoenix malls Arizona Center and Biltmore Fashion Park; Scottsdale (Ariz.) Fashion Square; and NorthPark Center, in Dallas, among others. “When you start to look at the full utilization of a parcel of 100 acres, what you’re saying is that you’ve got 75 acres there that you can really start to work with,” Laegreid said.

Before they tell their architects that “the sky’s the limit,” however, mall owners must figure out what to do with all those cars in the lot. The only realistic solution, at least for large projects, is to spend tens of millions on parking decks. “The incremental increase in GLA [gross leasable area] that you’re able to produce by eliminating surface parking must offset that cost,” said Daniel M. Herman, senior vice president of development at Developers Diversified Realty Corp., which is adding structured parking as part of its mixed-use makeover of the 1970s-era Totem Lake Malls, Kirkland, Wash. “You can’t just say, ‘I want to build a garage,’ without increasing your revenue stream.”

Traditionally, mall parking lots contain 4.5 spaces per 1,000 square feet of mall GLA, so a 1 million-square-foot mall would pack a whopping 4,500 parking spaces. In higher-density urban areas such as the Northeast, the cost of a stand-alone parking deck serving a mixed-use property is about $17,000 per space, says Timothy H. Haahs, owner of Timothy Haahs & Associates, a Blue Bell, Pa.-based engineering and architectural firm specializing in multilevel parking structures. A flat lot, by contrast, may cost about $4,000 per space. Not only has the price of concrete shot up in the past couple of years, but the more sophisticated look of today’s town center concept translates into greater expense, says Haahs. “It can’t just be an ugly garage anymore,” he said.

And costs can become stratospheric if the site plan calls for underground parking, particularly when construction crews must dynamite bedrock or keep out subterranean water, says Charles E. Fancher Jr., principal of Fancher Partners, an Irvine, Calif., mixed-use and retail development firm. “There are urban sites that have huge demand for residential product, where [the residential] might command an exit sale price of $600 to $1,000 per square foot,” he said. “But those sites might not be able to withstand a parking cost of $35,000 per space.”

Given such constraints, how many of the approximately 1,100 enclosed malls in the U.S. today are candidates, either now or in coming years, for densification? In the near term, architects and developers say, two kinds of properties seem best suited for going vertical: top-notch urban malls with high recognition among consumers, and certain lagging malls in markets that, though robust in themselves, lack a true town center.

Westcor’s Biltmore Fashion Park, a 40-year-old dining and shopping destination anchored by Saks Fifth Avenue and Macy’s, with upscale in-line tenants the likes of Cartier and Williams-Sonoma, falls into the first category. Plans to add structured parking and midrise buildings are working their way through the entitlement process, Scholl says. Biltmore Fashion Park and its address are so well known that hotel operators and other users will pay a premium to be there, Laegreid says. “If you start talking about ‘The Ritz-Carlton at Biltmore Fashion Park’ or ‘The Offices’ or ‘The Commons at Biltmore Fashion Park,’ you add additional equity and are at a competitive advantage to something across the street or down the block,” Laegreid said.

PREIT’s Echelon Mall, in Voorhees, N.J., is in the second category. The Philadelphia-based firm has renamed the mall Voorhees Town Center and has plans to demolish two anchor stores and add 425 multifamily units served by structured parking and Main Street-style amenities.

“For a mall, the location isn’t as strong as it could be, and it was really sort of beaten out by the competition — there are three other malls in the area,” said Joseph F. Coradino, who directs retail operations for PREIT and is president of the PREIT Services and PREIT-Rubin management affiliates. “The more we thought about the possibilities, the more we kept coming back to creating a town center.”

Such underperforming properties exist in nearly every healthy market, and developers are focusing harder than ever on creative ways to make them more competitive, says Jeffrey J. Gunning, vice president of North American operations at RTKL, a Baltimore-based architectural firm. “These aren’t as valuable from a retail standpoint as they once were,” Gunning said. “But rather than try to unload them on some other developer, these assets can be transformed into something that has value for a different reason. Done well, these can be the downtowns some of these suburban communities never had.”

In the long term, mall owners are betting that densification will become more commonplace as growth drives up land values in markets that support only lower-density uses today. “That’s triggering us to design our brand-new malls with more of a block approach to the parking lots,” Scholl said. “That way we’ll have nice rectangular lots with a grid system of driveways, interior roads and utilities, so that in 15 years we’ll have these parcels in a shape that would support converting them right over to above- or below-grade parking structures, possibly as podiums with residential or office on top.”

General Growth is taking a similar approach with its 22,500-acre Summerlin Centre master-planned community, near Las Vegas. The Chicago-based REIT plans to start construction on the massive project in the spring. It could take until 2020 to finish.

For too long developers have built malls and then years later struggled to figure out how to add new uses and rework the parking, D’Alesandro says. “What we are now saying is, ‘After having done that for 50 years, what if we anticipate that? What would that be like?’ ” said D’Alesandro. “We’re designing Summerlin Centre so that as we add these uses they come together like pieces in a puzzle.”

Other factors could work in favor of higher-density malls. Despite the daunting cost of parking decks, for example, tearing up asphalt could be less painful than one might think. Twenty or 30 years ago, cheap land enabled developers to err on the side of caution and build parking lots that were unnecessarily large, says Michael I. Lebovitz, senior vice president and chief development officer of CBL & Associates Properties. “Most malls are overparked,” he said. “There are 18 days a year when every space is occupied, but people still always find a place to park.”

Knowing this, CBL has been able to replace redundant spaces at many of its malls with lifestyle components while avoiding the high cost of building parking decks. The same is true at Inlet Square, a 500,000-square-foot mall in Myrtle Beach, S.C., where Fancher is using the massive parking lot — 39 acres of asphalt, retention ponds and landscaping — as a launching pad for offices, a hotel and open-air retail space.

Furthermore, the growing phenomenon of public-private partnerships means developers do not always have to pay the entire cost of a parking deck themselves. The national backlash against the abuse of eminent domain, meanwhile, is making it harder for cities to aggregate the multiple parcels of land they need for mixed-use redevelopments, Fancher says. Rather than give up on so-called smart growth, some municipalities might be more willing to form partnerships with mall REITs that happen to own huge islands of asphalt in the middle of town.

At the risk of mixing metaphors, it all adds up to a sea of opportunity.