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Unconventional buyers of former shopping malls are reshaping commercial real estate development.
For decades, the shopping mall was a symbol of prosperity and a social place for people to congregate. However, shopping malls, especially larger indoor malls, have been facing a steady decline for decades. While components of the commercial real estate market continue to evolve, large shopping malls—especially those built in the second half of the 20th century—are struggling to remain relevant in a rapidly changing retail landscape. Many articles have been written about the downfall of the shopping malls with eye-popping statistics, including, according to one author, that the number of shopping malls has fallen from 2,500 in the 1980s to roughly 700. Although there have been some positive financial indicators for remaining mall owners over the past two years or so, there is no guarantee that the downward trend will not continue in both the short- and long-term future. From a legal standpoint, distressed mall transactions present unique challenges in due diligence, title clearance and zoning compliance.
Several key factors have contributed to the downturn of shopping malls:
The Rise of E-Commerce
Online shopping has fundamentally altered consumer behavior. With the convenience of browsing, comparing and purchasing products from home, many shoppers have shifted away from brick-and-mortar stores. Giants like Amazon, along with direct-to-consumer brands, have captured significant market share, reducing foot traffic in traditional malls.
The COVID-19 Pandemic
The pandemic accelerated existing trends. Lockdowns and health concerns forced many retailers to close temporarily or permanently. In many instances, malls that were already struggling found it difficult to recover.
Changing Consumer Preferences
Today's consumers, especially younger generations, prioritize experiences over material goods. This shift has led to a rise in spending on dining, travel and entertainment rather than traditional retail. Malls that fail to adapt to these preferences are losing relevance.
Over-Retailing and Market Saturation
Shopping and strip malls have been built all over the U.S. for decades. Even though the construction of large, indoor malls has all but stopped, this oversupply has made it difficult for many malls to maintain occupancy and profitability.
Loss of Anchor and Staple Tenants
Over the past 20 years, malls have had to endure significant bankruptcies and restructurings, including anchor tenant chains such as Macy's, Sears, J.C. Penney, K-Mart and Toys-R-Us as well as staple stores like Forever 21, Claires and Pier 1 Imports. The loss of income from these stores, coupled with the ripple effect of having less foot traffic because these stores were no longer there, has caused a significant issue for mall owners and operators.
As a result of these issues, many malls are facing one of four typical outcomes, all of which have possible impacts for construction companies:
- Foreclosure or Investor Acquisition
Financially distressed malls often fall into foreclosure, or their owners must find investors or new owners to avoid the possibility of foreclosure. In some cases, investors purchase these properties at a discount, hoping to repurpose or revitalize them. However, success is far from guaranteed; many properties remain underutilized, and some investors neglect even basic maintenance after acquiring them at bargain prices. To avoid negative repercussions that may come from one of these investors buying the property, some retailers have had to pivot to an entirely different strategy: buying the physical building from their landlord. An example of this is what happened to the Longview Mall in Texas. There, department store chain Dillard's and a partner purchased the mall for $34 million in what it said was a preventative measure to stop the property from deteriorating under new ownership. - Adaptive Reuse
Some developers are reimagining malls as mixed-use or residential developments. Former retail spaces are being converted into entertainment spaces (such as trampoline parks or pickle ball facilities, e.g.), office spaces, medical centers, schools or even churches. Some examples of this include Golf Mill Mall in Niles, Illinois, the Westside Pavilion in Los Angeles and the Lakeside Mall in Sterling Heights, Michigan. This approach can breathe new life into a property while meeting local needs. This provides a unique opportunity for construction companies that can perform work in the space. - Boutique and Local Retail Influx
As national chains exit (either voluntarily or involuntarily), smaller local businesses and boutique shops sometimes move in, attracted by lower rents and the opportunity to reach a broader audience. While this can create a more unique and community-focused shopping experience, it often isn't enough to fully revitalize a large mall and may actually lead to less foot traffic within the mall itself. These tenants may also be a larger financial risk for a mall owner or operator. - Demolition
In cases where redevelopment is not viable, demolition may be the only option. The land may be repurposed for housing, medical centers or converted to green space. In many instances, this is the end result when a mall sits unoccupied for long periods of time creating a nuisance and possibly a safety issue. This can not only represent a new beginning for the community, but significant opportunities for contractors and developers.
Although the demise of the traditional indoor shopping mall may have an initial negative financial impact, opportunities within the construction industry can flourish. More specifically:
- Demolition Contractors—Around 2,000,000 square feet of retail space was demolished in 2022 alone.
- Retail Construction Companies—If a decision is made to transform a mall, especially if it is being done to create a reuse that keeps the general building envelope, significant construction work will more than likely need to be done, including everything from updating or moving electrical, plumbing and/or HVAC to completely rebuilding the space(s) to accommodate the new tenant or owner.
- Architects and Design Professionals—The decline of the shopping mall has opened up a significant opportunity for architects and other design professionals to consider unique plans to either adapt malls into other uses or create alternative structures in a large open space that may not otherwise exist in an urban or suburban location.
- Residential Contractors—In a large portion of the instances where a mall's use is being adapted or the mall itself is being demolished, the end result involves some component of residential living. Not only will this have positive impacts for general contractors, but all subcontractors that would typically perform in that space.
What Comes Next
As distressed malls continue to change hands, unconventional buyers such as department store chains and private equity groups are reshaping the commercial real estate landscape. These acquisitions are not merely financial transactions—they involve complex legal considerations that can significantly impact redevelopment timelines and costs.
Looking ahead, distressed mall transactions will likely increase as traditional retail continues to contract. Legal professionals play a pivotal role in structuring deals that mitigate risk while unlocking redevelopment potential. For stakeholders, the ability to anticipate regulatory challenges and market shifts will determine success in this evolving sector.
Originally Published By Construction Executive.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
