What’s next for dead malls?

Dec 1, 2014, 10:16 AM | Updated: 10:16 am

Last month, the National Retail Federation forecast 2014 holiday sales to increase a healthy 4.1 percent, higher than last year’s actual 3.1 percent seasonal increase.

While retailers might be pleased with this upward trend, they understand seasonal shoppers are heading out into a transforming landscape where the suburban mall of yesteryear is fading into digital consumerism, impacting more than just the way we shop.

Over 50 years ago, the world's biggest shopping mall opened in Randhurst, Illinois. The grand opening occasioned the largest parade in the town's history, led by the famed Vienna-born architect Victor Gruen. There were sneak-peak black-tie charity events in the run-up to the opening, a massive 50-page special advertising section in the Chicago Daily Tribune, and large animal sculptures carved from Portland limestone trucked into the mall's huge Gallerie dome.

Back in 1962, when thousands gathered amid the spectacle of 10,000 balloons sailing toward the skies, a mall was reason to celebrate — highlighting the triumph of man over nature with their vast, climate-controlled spaces, and becoming a mecca to the growing numbers of newly suburban Americans. For the next 30 years, developers opened more than a thousand new suburban malls, each one bigger and better.

And then, as the nation battled economic setbacks and turned to the Internet, the building stopped and malls stagnated. “There is not a lot of good news for this segment, which has been experiencing a pretty steady decline for the past eight years,” says retail consultant James E. Dion, president of Chicago-based retail consulting firm Dionco Inc.

Earlier this fall, Chinese-based online shopping bazaar and e-commerce company Alibaba went public with a splashy, initial stock offering of $25 billion, which ranked as the world's biggest. The news underscores the worldwide popularity of digital commerce and characterizes the nation's once-beloved malls as something else entirely.

The suburban mall is no longer the social and economic heart of suburbia, leaving behind not only abandoned hulking concrete and cracked asphalt parking lots, but also the promise of badly needed local sales and property tax revenues.

The perfect storm

Not a single new, fully enclosed mall has opened in the U.S. since 2006. And, from 2006 until 2013, e-commerce doubled, illustrating that people and their pocketbooks are moving towards other marketplaces almost as quickly as fingers clicking on a keyboard.

Retail consultant Dion points out the rapid building of malls in the 1970s and ’80s led to overdevelopment, which was compounded by the rise of e-commerce and economic turmoil. “It was almost like a perfect storm that hit retail,” Dion says.

The mall’s large anchor stores began to suffer first. In 2000, signaling the coming changes, Montgomery Ward’s filed for bankruptcy. Other mall stalwarts like Circuit City and Linen’s & Things were next, followed in 2011 by bookseller Border’s. The closure of these anchor stores rippled so that from 2007 to 2009, more than 400 of the 2,000 largest malls in the U.S. closed.

As bankruptcies, closings and consolidations plague brick-and-mortar outlets, online sales continue to climb. Forrester Research forecasts online sales, which accounted for about 8 percent of total retail sales in the U.S. in 2012, will grow 10 percent for the next five years, reaching $370 billion in sales by 2017 and accounting for a full 10 percent of all retail sales nationwide.

Beyond an eyesore

The fallout from dead and dying malls extends beyond nostalgia and fascination on popular websites like deadmalls.com to include offline considerations like lost tax revenue and jobs.

The still-thriving Premium Outlet Mall in the suburb of Aurora, Illinois, illustrates how communities benefit financially from successful shopping malls. In 1989, before the area was redeveloped, the city collected $25,000 in property taxes. Today, that same land generates about $8 million in taxes a year, and the outlet center accounts for about 50 percent of that figure.

In addition, local communities also lose out in collecting sales tax when consumers choose online shopping like Amazon and Alibaba, since savvy shoppers know these online purchases don't include sales tax.

“The tax issue is a double whammy for the communities,” says Dion. “They lose big on property taxes when the malls aren’t doing well and they also lose when consumers buy online because there is no sales tax revenue coming back from those transactions.”

Traditional retailers are advocating for online sales tax implementation, because in some states, strictly online businesses that don't collect sales tax can have as much as a 10 percent price advantage. Opponents argue it would force digital retailers to become tax collectors and could unfairly burden them with compliance, administrative and legal costs.

Consumers might not like the idea, but legislators crafted the Marketplace Fairness Act in 2013 to enable states to require remote sellers to collect sales tax, which can be funnelled back to local communities. The bill is pending in the House Judiciary Committee, but many expect interest will be revived now that the midterm elections are over.

Linda Bustos, director of e-commerce research at Elastic Path Software, agrees that the reality of online sales tax is “quite possible,” but adds it “would happen on a state-by-state basis, and not all at once.”

Meanwhile, e-commerce continues to accelerate and isn't looking back. Sales figures show U.S. retail e-commerce from 2006 to 2013 more than doubled from a total of $102 billion to $210 billion, according to statistica.com, and most experts predict e-commerce will maintain double-digit increases for the near term.

Down but not out

Today's traditional retailers aren’t doomed, but they do have challenges.

“It's been reported that 90 percent of shopping still happens offline, so much of brick-and-mortar is not going away,” said Bustos, who consults with online retailers as they shift to embrace omni-channel retailing by bringing digital experiences in-store.

In this changing landscape, Bustos, who also authors the Get Elastic Ecommerce Blog, says the retailers that are going to survive and thrive need to better understand and navigate the threat of online channels like Amazon and Alibaba.

“One strength retailers have is their local presence,” Bustos explains. Retailers that understand consumers still like to try products before they buy can provide personal service like offering in-store pickup or returns, and integrate technology to enhance the in-store shopping experience. Simple ideas like providing access to digital product information and reviews via mobile devices as well as offering responsive sites and mobile apps can be a big plus.

The mall's next evolution

By creating higher density and more diverse spaces that are easily accessible, provide a natural/outdoorsy element and are pedestrian-friendly, communities are developing dead and dying malls.

Two years ago, developers announced a $190 million transformation of the old Randhurst Mall, demolishing most of the original center, creating office space, providing an open-air street market and boutiques as well as new anchor tenants, like a multiplex theatre and a 120-room hotel.

Retail analyst Dion adds that specialty stores, like those just for runners/joggers, and independent niche stores might work well in this renewed suburban landscape. Malls are often blamed for the demise of the “mom and pop” stores, but those very stores today could help repurpose malls.

Other ideas to improve these potential community assets and revive tax collection include attracting mixed uses like residential, medical, warehouse and office space, and examining the possibility of restoring an ecological wetland, or creating an environmentally friendly use. Like Randhurst’s latest evolution illustrates, many of these emerging transformation plans — from Virginia to Las Vegas — feature mixed-use plans that aim to integrate the best of e-commerce, traditional retail and a sense of community. The future of retail as we know it might well depend on how well they hit this moving target.

Margaret Rock is freelance writer and reporter based in Chicago.

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What’s next for dead malls?