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.