It's hard to escape the irony in Amazon.com Inc.'s plan to lease space for an 855,000-square-foot fulfillment center where Cleveland's once-mighty, but long closed and now mostly demolished Randall Park Mall once stood. Over the next few years—the Amazon center is scheduled to be operational in late 2018—locals who had once bought stuff at Randall Park will find their online orders fulfilled out of the same property.
Billed as the world's largest mall in the 1970s, Randall Park, like other malls, fell on hard times as the e-commerce phenomenon essentially invented by Seattle-based Amazon blunted the need or desire to drive to a mall. In its traditional form, the mall model is unlikely to make a comeback. E-commerce, which accounts for just 12 percent of total U.S. retail sales, is on the cusp of making large inroads in market share. There is a surplus of mall space; real estate services giant CBRE Group Inc.'s mall "availability" rate, which measures vacant space as well as occupied space that's being re-marketed to new tenants, today stands at 6 percent, double the rate of less than a decade ago.
With their tenants experiencing declining traffic and facing a mix of falling rents and rising costs, many mall operators may have no choice but to shutter. Investment firm Credit Suisse predicted in June that 20 to 25 percent of U.S. malls could close during the next five years. The main culprit: A projected doubling of online sales of apparel, which is the principal product sold in many malls.
Yet the land will remain, as will the structures—at least for properties with the prospect of undergoing some form of repurposing rather than demolition. Many malls sit on large parcels with flat topographies that would be capable of accommodating the needs of a large DC. A large number of older malls are in densely populated residential areas, though in some cases the neighborhoods may not be particularly desirable. Many have decent road infrastructure, a holdover from an era when developers and communities invested in roads to entice suburban consumers to shop at the malls. "Where roadway infrastructure once helped shuttle people to and from a mall, it could now support the shipping or trucking of goods and materials to and from a new distribution or fulfillment center, provided there are no issues from the surrounding neighborhoods," said Aaron Ahlburn, director of industrial research for real estate services giant JLL.
Amazon, which has never before taken this route to build out its fast-growing fulfillment-center footprint, is one of the country's most influential companies. Amazon's halo effect alone could spur discussion over malls' budding potential as distribution centers or e-commerce fulfillment hubs.
Those looking to take the plunge are likely to find a buyers', or lessees', market awaiting them. For many years, retail real estate commanded higher rental rates than industrial property. At the same time, "capitalization" rates, the ratio of a property's value to its operating income, were traditionally more compressed for retail than industrial. This meant retail buyers were willing to pay higher rates for the same amount of income compared to industrial buyers. Since the Great Recession and the e-commerce explosion, however, the gap between retail and industrial has significantly narrowed, according to James Tompkins, founder of consultancy Tompkins International.NO SLAM DUNK
Converting traditional mall property to industrial use is hardly a slam dunk, however. Repurposing an entire standing mall into a facility supporting large-scale DC operations is nearly impossible to do because of severe configuration restrictions, said Joe Dunlap, CBRE's managing director of supply chain services. Among the many shortcomings Dunlap cites: Low or irregular clearances, uneven floors, an insufficient number of dock doors, inadequate sprinkler systems to protect high-value cargo, and a chopped-up inner wall structure that makes worker mobility laborious and circuitous.
Demolishing an existing mall and rebuilding it from the ground up is an option only for the deep of pocket. Amazon is leasing the North Randall location from Atlanta-based developer Seefried Industrial Properties Inc., which will oversee what's left of the demolition that began three years ago and then build the fulfillment center at a reported cost of $177 million. It has also been reported that the Cleveland-Cuyahoga County Port Authority plans to issue $123 million of bonds to finance the project. Not every mall project will have Amazon's imprimatur, or a willing public sector funding source.
Yet Tompkins said that outdated malls can be effectively repurposed in their current design, and without being torn down. Many interior malls have multi-story designs with open courtyards or atriums that would be well suited for the low-cost automated order creation and parcel sortation that is the linchpin of e-commerce fulfillment, he said.
Tompkins cites an example of a traditional two- to three-story indoor mall with stores on either side of a central multi-story courtyard. A mini-load ASRS could be used for storage in the courtyard and for doing batch picking. Totes of batch orders could be dispatched to an area of the mall once occupied by retail stores, and via a robotics unit and parcel sortation system be sorted into individual orders and then packed and sorted to delivery zones or to click-and-collect pickup locations, Tompkins said. Batch picking could be done in the mall on each level for orders to be dispatched to "stores" on multiple levels, he added.
Mall repurposing will be done opportunistically starting next year and become mainstream in 2019, Tompkins predicted. This will all be part of a larger discussion over the need to have bricks-and-mortar and digital commerce co-exist rather than consumers and companies having to choose between the two, he added.
The lease of the old North Randall mall demonstrates that, as it has been many times over the past quarter century, Amazon is positioned at the vanguard of something relatively new. Neill Kelly, a CBRE senior vice president and leader of its Occupier Restructuring and Disposition practice, has seen no interest so far from logistics companies in the department store spaces CBRE is marketing. But Kelly said the mall's time will come, especially as the retail and logistics markets continue to evolve.
"The distress in the retail space has to go a little deeper, and the e-commerce fulfillment companies are going to have find a little more justification in their underwriting for those locations. But I guarantee that they will intersect, and that will be a viable avenue for second-generation big-box space that's well located," he said.