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01/12/2022

How non-retail tenants can boost retailers in municipalities

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Cities desperate to keep retail taxes flowing need to shore up their centers with non-retail tenants.

Cities and towns are under tremendous pressure to generate tax revenue in any way possible.

Historically, retail has been an invaluable source of tax revenue and cities and towns have bent over backwards to recruit new retail and keep existing retail in place. But the changing nature of retail has changed that.

Municipalities’ dependence on sales tax revenue, specifically as it relates to retail, is being undermined by the shifts occurring in the retail industry. Not surprisingly, the shift toward online shopping has had a monumental effect on brick-and-mortar retail. According to Statista, e-commerce as a percentage of total retail sales in the United States has increased from 6% in 2013 to 15% in 2021. Their projections show an increase to 19% by 2024. Further, per Statista, the U.S. leads the world in retail square footage per person at almost 24, followed by Canada (17), and Australia (11). These phenomena together result in a shrinking sales tax revenue base in many U.S. cities most impacted by vacant brick-and-mortar space, struggling shopping centers, and the incremental shift in sales to e-commerce businesses.

The over-stored nature of brick-and-mortar retail in the U.S. requires that municipal economic, community, and planning departments look beyond retail for other uses to substitute the loss in retail sales tax revenues with other forms of taxable revenues. However, towns and cities hold on to the notion that new retail can be supported, and in almost all instances that is just not true.

In so many cases the value of a property is not the retail asset; rather, the real estate asset on which retail has been located for decades. Therefore, cities must consider as part an updated master planning process the highest-and-best uses for the real estate where retail is struggling and where retail properties are vacant. Additional demand components from non-retail uses can strengthen the underlying value of the real estate and create a more vibrant community center from a smaller retail footprint. 

For example, incorporating multi-family residential, medical, or a new public library into a thoughtfully designed master plan for a struggling shopping center can strengthen the remaining market-viable retail -- especially grocery, food and beverage, and personal services -- by creating a strong sense of place.

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The worst-case scenario for a municipality is to have a blighted shopping mall or shopping center property. Blight is the canary-in-the-coal mine to a moribund economy and causes municipalities to lose considerable property tax revenue because of lower assessed commercial and residential property values throughout blighted neighborhoods. Struggling or vacant retail centers are typically run down and do not give a potential developer or resident the perception of vibrancy. A city is then in a difficult position of attracting investment when both the sales tax and property tax base erode. Therefore, it is important for communities to encourage new commercial and residential uses way before properties become blighted.

There are several examples of where developers and municipalities have opted to wait and see whether their blighted retail centers could be redeveloped as retail centers rather than assessing the highest-and-best uses for the dirt it sits on. One such example of looking beyond a retail-only redevelopment is Hilltop Mall in Richmond, Calif., a suburb of Oakland. Opened in 1976 and developed by The Taubman Company, this 1.1 million-sq.-ft. mall lost nearly all its tenants (except for a Walmart) yet was slated to be redeveloped in its existing format. After several years of being unable to execute this retail-only redevelopment, the mall was sold to Prologis to be developed as a technological innovation center with multifamily housing and a small, convenience-oriented retail component.

"In so many cases the value of a property is not the retail asset; rather, the real estate asset on which retail has been located for decades."

There are other examples of malls that are waiting too long to be redeveloped to their highest-and-best use and are becoming a blight on their community:

  1. Oakview Mall in Omaha, a 1.1-million-sq.-ft. center is significantly declining as a retail asset and no plans are in place to redevelop the center into a mixed-use asset.
  2. Montclair Place, a 1.2-million-sq.-ft. center in Montclair, Calif., continues to lose retail tenants, yet it is an excellent site for various non-retail uses.
  3. Elyria Mall in Elyria, Ohio, is a highly distressed and blighted mall where the real estate asset has other, longer-term sustainable uses given its location at the confluence of two interstate highways

There are many examples of distressed malls on excellent pieces of real estate that are being redeveloped to incorporate other uses that maximize the economic and financial value of the real estate and, therefore, transform a blighted project into a newer long-term sustainable asset. For example, Paradise Valley Mall in Phoenix, a former Macerich mall, was in significant decline. Costco had been added to the mall, yet traffic to the balance of the center was declining. Phoenix-based RED Development recently purchased the mall and has quickly demolished almost all of it except for J.C. Penney and Costco. Plans call for a smaller mix of convenience and grocery retail and restaurants as well as residential, entertainment, office and self-storage uses.

Municipalities need to be thinking long-term about the highest and best uses for distressed retail properties and working with ownership to redevelop those properties into community assets. The sooner the better.

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