Millennials May Have Killed The Mall, But Will We Be The Ones To Save It?

Millennials may have killed the mall (or so we are told), but the remnants could become the future of suburban communities. Or at least, that is what I mused while having an informal discussion with a friend who worked in commercial real estate. He bemoaned the plummeting rents in New York city where the once profitable storefronts printed money, now sit disused, brown-papered with 'For Lease' signs in the windows. People once went window shopping at such establishments; a fleeting glance whilst strolling down the street. That, however, like much of the business that these stores used gorge themselves on, has too moved online. Truth be told, while my friend was feeling the pain in urban, retail commercial rents, the pain is exacerbated in malls all over America. And it is a problem that has been getting worse as of late; you may have heard of the phenomena dubbed “retail apocalypse”.

While you may be asking yourself what disused commercial space has to do with “the future of housing", a town in North Jersey (a strange and faraway place to those of us that grew up in South Jersey) called Holmdel has approved the first steps toward that very thing. A massive commercial complex that once housed the research and development headquarters for AT&T, and before that the Bell telecom conglomerate, will be repurposed to become the center of a residential & commercial mecca. The facility formerly known as 'Bell Laboratories' will be renamed 'Bell Works'.

While this may sound like a former warehouse to loft conversion in SoHo that us Millennials are all too familiar with, it is worth considering how large this facility is, and the scope of the project undertaken. For example, the laboratory was home to over 5,000 workers in it's heyday; this is a 1.9 million square foot facility on over 575 acres. To put that number in perspective, the new community will be about the size of the Empire State Building turned on it's horizontal axis. Not only is it large,but it is a historically significant facility as well. Since it opened in 1962, work from 8 different Nobel Prizes was awarded to researchers whose research was done at Bell Laboratories. It was even designed by a world renown architect and is listed on the National Register of historic places.

As mentioned, the town of Homdel recently approved this renovation to a new community. 

 So what will that look like?

A mix of commercial clients have occupied some of the office space on the upper levels, but it is the plan for the rest that is interesting. The first floor will be open to the public, walkable and lined with food and shopping. There will be a public library. The roof of the building is set to become a hotel while the basement will form a ballroom and conference center. There are fitness centers, daycare, salons and even an “urban park" with trees and benches.

Sounds a lot like an enclosed city. I want to go.

And that's the point: Attract young, relatively affluent people who have been leaving the suburbs for cities that have these amenities within walking distance already. To accommodate people who want that kind of lifestyle, 185 condos and 40 (large) single family homes will be constructed on the property. Developers wanted more affordable, multifamily housing, but the local government would not accommodate. We shall see how this could affect similar projects moving forward, or even as the redevelopment of Bell Works continues going forward.

Projects like this make me revisit the idea I had when talking to my friend a few month back: Why not convert empty malls to housing? "What would they be lacking" I consistently muse to myself? There is already parking, the traffic flow & other civil engineering concerns should be adequately addressed prior, they tend to be centrally located, need tenants and there is room for development/zoning for amenities with the size that the parking lots & malls themselves tend to be.

This, however desirable, will prove difficult to execute for many industries. The first step will always be government approval, but let's assume that is not a factor for a moment. It will be a huge opportunity for the companies that are able to figure out ways to innovate and capture this market.

Let's look at all areas of the homebuying process for this exercise:

-First, the properties will need to exist. This will be a series of identifying, retrofitting and listing the existing malls. Construction companies will need to learn the skills to do such a thing, which would start with the proper prospecting & acquisition of properties that are deemed 'suitable'. From there, they will need to develop various construction techniques that make the properties suitable for living, safe per building codes, and properly desirable to sell.

-After the properties are ‘created’, they will need to be sold. To do that, Realtors will need to be involved.  Due to the unique nature of the properties, I would imagine the amount of buyers number relatively few. As such, a great niche could form for that type of buyers (Realtors, feel free to comment below with opinions)

-Financing the property would prove to be tricky. I am qualified to say that this type of property would not qualify for any sort of conventional or government mortgage that currently exists (to the best of my knowledge). Even the most inventive and creative mortgage financing options tend to exclude buildings such as 'CondoTels' (hotels converted to condos), so I would imagine CondoMalls (I made that up) are out as well. So, finding loans on these types condos would be exceedingly difficult, would come at a rate of interest well above the prime offer rate and down payments would be much higher, in all likelihood. This poses a great opportunity to connect with a younger demographic for FinTech lending companies (and I guess banks that have innovating aspirations). *If you are a mortgage lender who has financing available for CondoMalls, please reach out to [email protected]*

-Insuring the property would likely give underwriters at any major insurers headaches, and they may not want the business. This could, again, force you to look at alternative methods (Lloyds of London -style insurance?) to cover the home. This.would more than likely be at a higher cost, and companies that develop ways to insure this risk pool in a more efficient manner stand to benefit. *Again, if you are able to insure this, I'd love to hear from you*

-Once the properties are financed & secured, this would also open the door for Securitization. Mortgage backed securities (MBS), while once a fairly common financial vehicle, have become extremely rare in the recent past, no doubt due to the 2008 collapse that was triggered in large part by poor quality MBSs. These MBSs are making a comeback, however, and loanDepot.com has successfully securitized a large batch of Jumbo & High balance in mid 2018. With the higher interest rates in the market, as well as the projected higher rate of interest on a 'MallTell' financed property, these could be potentially high yield and quality. 

-Finally, a whole other industry could, and I am guessing would, develop around maintaining and supplying these properties with desirable amenities. These Homeowner's association type of groups would be tasked with the maintenances of the facilities, deciding which businesses should share the space with residents, security, as well as dealing with legislating/enforcing community guidelines. Additionally, at some point, they will be charged with debating the merits of the business tenants. There will be some that are a convenience for everyone that live near, but do not generate much profit. Conversely, there will be some stores that do a bang-up business, but do not provide much utility to the community, So this HOA hybrid must weigh profit vs convenience. This would be more involved than any property management groups I know of

With all of that being said, I do believe that in some form or fashion, that the Bell Works redevelopment project is something that can be applied to many different areas to create the ‘modern suburbs’.

This idea appeals to me, but would anyone else live in a repurposed shopping mall? I would be thrilled if I could drop my dry cleaning off after work, go to the gym, buy some food, get a shower and go off to meet my friends for a drink, all without getting in a car, on a train or going out of my local WiFi. There are certainly some trade offs, however, as I am sure having 3,000 people in your downstairs every Friday/Saturday night could grow wearisome.

What say you?

About:

Andrew Leonardis is an Account Executive with LoanDepot Wholesale focusing on Broker and Correspondent lending, but is also an experienced Loan Officer. Andrew studies, follows and researches economic, financial and mortgage market related topics. Please reach out with any questions/comments on the article, or with any mortgage related scenarios to [email protected] or 609.254.4976

The opinions expressed are my own and do not necessarily reflect the views of anyone else

Sources:

https://www.fastcompany.com/40513730/can-we-create-a-new-kind-of-downtown-in-abandoned-suburban-offices

https://en.wikipedia.org/wiki/Bell_Labs

for more information on Bell Works, visit: https://bell.works/ Note: I am not affiliated with Bell Works, or any phase of the project in any way.