Westside Pavilion, a dying mall in Los Angeles, ticked all of the boxes for Hudson Pacific Properties.
The Los Angeles-based developer was looking for an urban site with big floor plates and exceptionally high ceilings to redevelop into what it called “state-of-the-art creative office space” for future tenants. The company also wanted a central location near mass transit and major highways, in one of the handful of West Coast cities where it usually builds.
Then, as Hudson Pacific started planning to outfit the mall, along came Google, a Hudson Pacific tenant elsewhere in the city.
“The stars kind of aligned,” said Alexander Vouvalides, the developer’s chief investment officer.
The old mall would become new office space. The 584,000-square-foot Google complex, to be called One Westside, is projected to be finished in 2022 at a cost of up to $410 million.
The Westside Pavilion redevelopment is one of the latest examples of a nationwide trend in commercial real estate: the conversion of malls into office space. Offices are less risky than retailers, and in some cases they can generate foot traffic for the mall’s remaining stores and restaurants.
The biggest beneficiaries of the conversions are coworking enterprises, like WeWork, which provide shared work spaces primarily to entrepreneurs, freelancers and startups. The highest concentration of coworking spaces in retail nationally is in malls, according to an August study by the global property company Jones Lang LaSalle. The same study predicted that coworking space in retail in general would grow at an annual rate of 25% through 2023.
But this is not another chapter in the tale of how brick-and-mortar retail is being ground under the foot of online shopping. Malls have long been converted into other uses, including apartments, condominiums, and sports and entertainment venues. Instead, developers and landlords are seeking what Vouvalides described as “a higher, better use” for the properties, a sentiment echoed by elected officials and supported by real estate data.
Officials see the conversions as a way to repurpose buildings that are probably doomed to suffer gaping vacancies anyway. Westside Pavilion’s two big tenants, Macy’s and Nordstrom, had exited by mid-2018, for instance, and few retailers could replace them.
“The Google conversion will be great for our economy, and our city,” Mayor Eric Garcetti of Los Angeles said in a statement. “It will revitalize a dormant space, create a vibrant transit hub and deliver good-paying jobs.”
The tax boon for the city is likely to be greater than if the space had been turned into housing. Commercial real estate tends to generate much more in local property taxes than residential uses, said Christopher Calott, an architecture professor at the University of California, Berkeley.
And surrounding communities tend to like offices more than malls because they are open fewer hours and generate less foot and vehicular traffic.
“Residential communities like offices for their visibility and the peak use during the day,” Calott said. “Retail or a shopping mall could potentially be far more of a nuisance in a residential situation.”
Vouvalides said Hudson Pacific had anticipated this with Westside Pavilion, which opened in 1985 and before its decline had been a part of the local fabric.
“The number of people coming into a retail center relative to the number of people that work in an office building, it’s actually a less dense use,” he said, “so we thought that would be received favorably.”
Mall owners have a financial incentive, too. Because they tend to stay longer, office tenants can generally be a more reliable moneymaker for landlords than stores and restaurants.
They can complement, too, any retail that remains in a mall. Office workers will shop, eat and otherwise inhabit the mall’s ecosystem, providing an incentive that owners and operators can use to retain and draw other tenants. It is another branch in the evolution of brick-and-mortar retail — in-house office space as a selling point.
“The owners of the shopping centers’ desire is to get people to their property,” said Greg Maloney, president and chief executive of the Americas retail unit of Jones Lang LaSalle. “Any way you can get people there and they see what you have to offer, your sales are naturally going to go up.”
Maloney also said office worker demands had changed, spurring mall-to-office conversions. More workers want to live and work in city centers and near mass transit, and they want amenities such as restaurants and gyms in walking distance, especially as working hours continue to extend beyond the typical 9-to-5 workday. Converted malls can provide those, he said.
Other developers are catching on to the trend.
New England Development, based in Boston, is converting 140,000 square feet on the third floor of its CambridgeSide mall in Cambridge, Massachusetts, into offices. Retailers on that level, such as Aeropostale and Banana Republic, are not getting the foot traffic they want or are reducing their footprint, said Douglass E. Karp, president of New England Development.
When the company looked around for a better mix of uses, office space seemed a natural fit, Karp said. New England Development has already drawn interest from multiple tenants for a 2020 move-in date.
Such changeover is inevitable as malls adjust not only to the changing retail landscape but to changes in work and living habits.
“It used to be you wanted to be kind of a purist and if you built a mall you just wanted specific mall tenants. In fact, mall tenants used to state things like that in their leases,” Karp said. “In today’s day and age, you’ve got to create a different experience.”
As in other real estate ventures, the No. 1 rule is location, location, location. That drives demand, said Jean-Marie Tritant, president of the U.S. region for Unibail-Rodamco-Westfield, a mall owner based in Paris.
“If you don’t have the demand, there would be no way you would turn something into offices,” he said. “It would be a waste of money and a waste of time.”
Unibail-Rodamco-Westfield has coworking spaces in two of its malls. In New York City’s Fulton Center, it has a partnership with WeWork, and it opened its own coworking concept, Bespoke, at Westfield San Francisco Center.
Cowork at the Mall, a New York-based startup, plans this summer to open its first coworking space at Chicago’s Water Tower mall in approximately 15,000 square feet that a Sports Authority once occupied. It is also planning two locations in the Los Angeles area.
The company originally assumed it would draw the most interest from smaller online firms that wanted a physical presence, said Mark Kennedy, chief strategy officer of Cowork at the Mall. Instead, the interest came from more established brands — like Lego, Microsoft, Nike, Old Navy, Riley Rose and Samsung — that told him they no longer needed larger footprints and multiple locations, he said.
Coworking arrangements will prove a boon to malls, Kennedy said.
“Coworking on the retail side is going to significantly help them because of the fact that they’re in serious trouble,” he said of malls. “They’re literally at death’s door.”
By: Tom Acitelli (Albuquerque Business First)
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