You might be surprised who's moving into those sad, abandoned malls

Consumers will still be heading to malls in the future. But their trips might have little or nothing to do with shopping.

Posted Updated
Parija Kavilanz
, CNN Business
CNN — Consumers will still be heading to malls in the future. But their trips might have little or nothing to do with shopping.

With mall vacancies accelerating at a rapid clip amid a surge in online shopping, landlords are quickly looking for other ways to reuse the glut of empty stores that will help boost traffic to shopping centers.

According to data from research firm (REIS) Moody's Analytics, the rate of mall vacancies is at a historic high of 9.8% in early September, exceeding the previous peak of 9.3% in 2011.

"I suspect that this rate will continue to float upwards over the next five years," said Victor Calanog, head of commercial real estate economics with (REIS) Moody's Analytics.

"The coronavirus crisis kicked the long-simmering rise of e-commerce into high gear," said Calanog. "As we start to recover from the pandemic, it is highly unlikely that vacancy trends will swing back to pre-Covid-19 levels" he said.

The stakes are high for mall developers, who are now repurposing the vacant space in a variety of ways.

Stores out. Doctor's office in.

In this environment, replacing a shuttered store with another store could likely backfire.

Alternatively, mall developers say they're scouting for businesses other than retailers to replace shuttered stores, anything from schools to doctors offices and short and long-term storage facilities both for residential and commercial customers.

"Pre-Covid there was an oversupply of retail space across the US," said Ami Ziff, director of national retail for Time Equities, which owns and manages hundreds of retail properties across the United States, including enclosed malls, free-standing stores and open air malls.

"Now, supply of available space is up and retailer demand is softer. So you have to be nimble and creative with who to lease it to and go out there and pull in a different type of tenant," he said.

At one of its properties -- The Landings in Columbus, Georgia -- Ziff said the company is signing leases with local retailers and restaurateurs but noted that there's been an increase of doctors and dentist offices signing leases across Time Equities' portfolio.

The Landings is a complex of three shopping centers in Columbus, Georgia encompassing approximately 300,000 square feet of open-air retail.

And at its indoor mall in Maryville, Tennessee, Ziff said a vacating JCPenney store is also drawing a lot of interest from non-retail businesses, including a tenant in the healthcare space.

"As mall operators, we can't just sit on our hands and wait for people to come to us. We have to go out there and sell these ideas because supply is greatly outstripping demand for space right now."

Wanted: Micro warehouses

The popularity of online shopping and same-day delivery has also boosted demand for spaces to serve as last-mile delivery fulfillment centers.

Ziff said retailers, including direct-to-consumer sellers, are racing to find empty spaces closer to their consumers in urban areas to create micro warehouses in order to speed up order deliveries.

"The empty stores in malls can be turned into these micro fulfillment centers," he said.

According to a recent Wall Street Journal report, Amazon is looking to convert former or current JCPenney and Sears stores into distribution hubs to deliver packages. Amazon declined to comment on the report.

Using vacant mall space to stock inventory is a smart idea, said Dan Neiweem, co-founder of Avionos, which provides digital commerce expertise to companies.

"Retailers are struggling to become super local so they can more quickly deliver to their customers," said Neiweem. Vacant stores in malls are already located near customers and they have the infrastructure set up.

What's more, he said retailers can set up the micro warehouses to not only be fulfillment centers for shipping out orders, but because malls already have shoppers coming in, they can conceivably let shoppers order and pickup from the warehouse on the spot.

'It's about using the concept in multiple ways," he said.

Sears left. A high school is moving in

Brookfield Properties, a subsidiary of Brookfield Property Partners and the second largest mall operator in the country, is bringing a school into one of its malls.

A former 70,000 square foot Sears anchor store at its Grand Teton Mall in Idaho Falls, Idaho is being repurposed to be a charter school set to open in fall of 2021.

Part of the mall's parking lot will converted into an outdoor play and recreation area for students.

The Alturas International Academy in the Grand Teton Mall will house close to 600 students grades 6 to 12, said Michelle Ball, executive director of the school.

"We wanted to start to add a high school but we couldn't afford to build a new one," said Ball. "The option to take this big box space that used to be a Sears store and renovate it excited us."

To maintain safety, she said any entry access into the renovated space through the mall will be closed, she said.

Ball said the new school's location is a win-win because "we are supporting the community here that needs a high school and the businesses in the mall could get more traffic because of it," she said.

Once completed, the school in the Grand Teton Mall won't be the only mall school in the area. Gem Prep Pocatello, another charter school about an hour away from the Grand Teton Mall, opened in a former Sears store at the Pine Ridge Mall in Chubback, Idaho last year.

The deal for the Alturas school was set in motion pre-pandemic, said Jeffrey Aronoff, senior vice president of leasing with Brookfield Properties.

He said Brookfield is also exploring bringing in other tenants like self-storage services, and indoor sporting facilities such as soccer fields to its malls.

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