The Westlake Shopping Center, which opened in the 1950s in Daly City, Calif., is one of the first modern malls in the country. Over the past seven decades, it has survived the rise of online retailers, the shuttering of anchor stores and operating restrictions related to the pandemic. Now comes its latest test: the addition of nearly 400 apartments.
The strategy, which is being closely watched by retail experts, is expected to increase foot traffic and generate more revenue from the new residents who may be more inclined to shop in their own neighborhood.
“They’re able to feed off each other,” said Conor C. Flynn, chief executive of Kimco Realty, the real estate investment trust that owns the mall. “It’s almost like an ecosystem where the customer shops your retail, the retailers will support the apartments and drive a premium for the apartments.”
The combination of malls and apartments is not a new concept, but more landlords across the country are rethinking their use of space in this way. The strategy builds on the live-work-play communities that are built to accommodate the needs of its residents and have been become popular in the past decade with young adults seeking amenities within walking distance.
“Malls, in their own right, generally are well located because they were built at the complement of two major interstates or highways, and they have large land mass,” said Rich Latella, an executive managing director at the commercial real estate services firm Cushman & Wakefield.
During the pandemic, malls found themselves suddenly having to fill thousands of square feet left vacant by struggling retailers like J.C. Penney and Gap. Others realized too much space was allocated to their parking lots. In December, the owner of Westfield Old Orchard, a mall in Skokie, Ill., a suburb of Chicago, announced that it would tear down a vacant Bloomingdale’s store to make space for hundreds of apartments by 2026. In the same month, a real estate investment trust in Fairfax County, Va., received approval to build an apartment building at its Springfield Town Center.
In Rhode Island, buyers have jumped at the opportunity to live in Arcade Providence, which was built in 1828 and is often referred to as the oldest enclosed mall in America. A decade ago, its owner converted the top two floors into micro-lofts, most of which went on the market in 2021.
Kristen O’Grady, 55, bought a 360-square-foot apartment there, which she uses primarily as an office for her graphic design work. A few times a month, she sleeps in the loft, which is outfitted with a kitchen, a bed, a shower, a wardrobe and an area for a desk. The first night she slept there with her daughter Ruby, it was all quiet — until about 2 a.m., when the neighborhood bars close and their patrons head out.
“I like to say it’s a dorm for grown-ups,” she said.
But mall owners face challenges, including evolving consumer tastes, zoning changes and local resistance.
Since the internet disrupted consumer shopping habits, malls have been trying to make a case for their existence. As old anchor stores have downsized, closed or filed for bankruptcy, malls have made space for grocery-store chains, climbing gyms, Covid-19 vaccine sites and dialysis centers in an effort to increase foot traffic and give shoppers a reason to stay longer.
Mall owners know they’re sitting on valuable property. Despite the slow demise of the department store business that was central to malls’ success when they were being built across the United States in the mid- to late 20th century, these centers still have several upsides.
“One good thing that came out of Covid for retail was people’s desire to be together, a sense of community, a lot more social activities — and one of those social activities is going to the malls,” said Gabriella Santaniello, founder of A Line Partners, a retail consulting firm. “That’s been great for general foot traffic. But you have to change with the times.”
At the Westlake Shopping Center, Kimco plans to turn the space that was once the Burlington Coat Factory into a 214-apartment complex. Kimco had already received approval from Daly City to build its first set of apartments, and the trust worked with Burlington to relocate the off-price retailer to the front of the mall, giving it space to build even more apartments and still have room for nearly 11,000 square feet of retail and restaurant space, Mr. Flynn said. In total, Westlake will have about 400 apartments.
Kimco bought the shopping center in 2002 for $80 million, and it has since navigated the storms that have befallen brick-and-mortar retail. Four years after the acquisition, a Home Depot was built on the site of a former J.C. Penney. Seeking to give the mall a town-square vibe, Kimco built a main street through the center of it and added more dining options.
Twenty years later, that Home Depot is still there, as well as a Safeway, a Target, a Ross and a number of small businesses. The property is also near a stop for BART, the public transit system in the Bay Area.
Carla Ocfemia, who owns Paw Patch Pastries, took note of these details when she was considering moving her dog-friendly bakery to Westlake from San Francisco, where it had been for 13 years. Before signing her lease, she spent the day sitting in the shopping center and people-watching. The residential feeling — even before the apartments had been constructed — was a selling point for her.
“It’s a lot more convenient for people,” Ms. Ocfemia said. “If they can walk there, then it’s simple.”
Winning over retailers is still a top priority for developers that want to add residences.
“One of the reasons it took so long to get to this point is because department stores had long-term agreements with the mall owner,” Mr. Latella of Cushman said. These deals, known as reciprocal easement agreements, allowed department stores to have a say over the makeup in the mall.
“Oftentimes, it was hard to get the department store to agree to do nontraditional retail uses on the site,” he added.
Mall owners also have to alleviate retailers’ concerns around parking issues and traffic jams during and after construction. But as more of these projects come to the market, they start building a case for themselves, developers say.
Mr. Flynn has made it a priority for Kimco to find ways to add residences to its 550 properties. Now, the mall owner is building about 1,000 apartments a year and taking a ground-lease approach, meaning that it works with a third-party developer to construct the apartments. Its goal is to have 15,000 apartments that are approved or built by 2025.
Kimco’s redevelopment strategy is reaping benefits: Last year, foot traffic across its portfolio was up just 0.6 percent from the year before, but it rose 5.3 percent at properties that have a mixed-use element, the company said.
“The biggest challenge, I think, is time,” Mr. Flynn said. “You’ve got to have a time horizon where sometimes these projects take five to 10 years before they even get entitled or put a shovel in the ground.”
Struggling malls don’t always have that timeline. In some cases, the malls that have fallen out of demand are demolished. Such was the case with the White Plains Mall in New York, which was built in 1972 and razed last year after losing retailers and relevance among consumers. In December, ground was broken on Hamilton Green, a multifamily building complex, in the spot where the mall once stood.
“This mall went from being an asset to the community that was driving economic activity and energy to a liability to the community of sitting there vacant,” said Scott Rechler, chief executive of RXR, the owner of Hamilton Green.
Adding residences isn’t the only solution that mall owners are considering. At the Moorestown Mall in New Jersey, a local medical center, Cooper University Health Care, will take over the space once occupied by Sears and build a clinic for outpatient services.
The addition of medical services within shopping centers is a popular trend as well, said Mr. Latella of Cushman. It’s becoming of such interest to real estate executives in retail that he now includes the concept in his presentations at conferences in a slide that reads, “The mall of the future: dinner, a movie and a colonoscopy — not necessarily in that order.”
But turning a mall into something more than a destination to buy shoes, makeup and prom dresses requires input beyond the board room. Community buy-in and city government approval is needed.
For its plan to build apartments at Westlake, Kimco had to receive approval from the Daly City Council, which it did twice. Throughout California, municipalities have been required to update their development plans to address a housing shortage, and developers there have received approvals to build residential complexes on their shopping centers.
PREIT, a real estate investment trust that owns 18 malls, formed a team that included a planner and traffic engineer to help with its approval process. In Moorestown, it moved forward with the process because it saw a “fairly progressive political environment,” said Joseph F. Coradino, the trust’s chief executive. In August 2021, the Town Council voted unanimously to approve the redevelopment plan.
“The shortage of housing combined with the infill potential for these sites are the reason of why they definitely make a lot of sense,” Jay Lybik, national director of multifamily analytics at CoStar, a commercial real estate data company. “I have not heard really a lot of pushback on these developments compared with other multifamily developments that do have problems moving forward due to regulatory or citizen pushback.”