The Master Plan: How Much Longer Can Shopping Malls Survive?

(Originally posted at FastCompany.com)

There are dead malls, and then there is Dixie Square. The suburban Chicago mall made famous by The Blues Brothers—who destroyed it on-screen in a spectacular car chase—had already closed by the time the film was shot in 1979. It’s just sat there ever since, not worth the cost of tearing it down. By now, trees sprout from the parking lot and the ceilings have turned to mush. Every attempt to redevelop the site—into a showroom for kitchen implements or senior housing—has fallen through due to asbestos, fire, and one suitor accused of threatening his creditors with a gun.

Last week, a shadowy group of local investors let it slip that they had won permission to demolish the mess. They intend to replace it with a constellation of discount big-box stores floating in a fresh sea of pavement. This shouldn’t be surprising considering the partners’ backgrounds, several reportedly build stores for Target and Lowe’s for a living—but it’s disappointingly modest proposal for 35 acres of urban tabula rasa. While their lawyer promises their plan will create 400 permanent jobs and $1.5 million in annual taxes, the surrounding city of Harvey has some of the highest crime, unemployment and poverty rates in Chicagoland. This rust belt suburb needs so much more than retail.

But the plans for Dixie Square have less to do with residents’ needs than what the partners can arrange in financing. (So far, they’ve pledged $3 million to pay off the previous owner’s liens, but that’s it.) While this may seem so obvious as to not be worth mentioning, the truth is that most of us remain in the dark as to the extent of Wall Street’s role in shaping the look and layout of Main Street—and the nearest interstate exchange. Anyone wishing to undo the worst mistakes of American postwar planning, whether urban farmers, New Urbanist architects, or enlightened developers of “town centers,” will have to crack the financing code to make it happen.

The first shopping centers are as old as suburbia itself, which you can trace back to the opening of Kansas City’s Country Club Plaza in 1924. But the explosion of exurban “edgeless cities” such as Arapahoe County, Colorado or Gwinnett County, Georgia dates back to the 1990s, and was precipitated not by any great shift in American standards of living, but by the fallout from the 1980s savings & loan crisis.

As told by Christopher Leinberger in his book The Option of Urbanism, the greatest real estate fiasco in American history up to that point triggered a federal ban on bank lending to developers from 1990 to 1992, inspiring Sam Zell’s rallying cry, “stay alive until ‘95.” The first real estate investment trusts (REITs) were launched with IPOs in 1993 in an effort to raise money against giant bundle of bankrupt, illiquid assets. The trading of commercial mortgaged-backed securities soon followed; by 2007 they were nearly a trillion-dollar market, while the market caps of America’s publicly-traded REITs approached half-a-trillion dollars.

A side effect of the securitization of real estate was the commoditization and standardization of place. Banks were only willing to underwrite what they knew, and what they were confident could be traded in large commodities. They didn’t know much—Leinberger identifies only “nineteen standard real estate product types” Wall Street is willing to deal with. That covers everything: home, office, retail and industrial. The list was liable to change at any moment as some types became overbuilt and were replaced with other, formerly nonviable ones. If your project didn’t conform to the one of the nineteen types, “you either did not get financing, or if you did, it was far more expensive.”

This is how every place began to look like every place else. The landscape became liquid. As Tom Wolfe described the exurbs of Atlanta in A Man in Full, “The only way you could tell you are leaving one community and entering another is when the franchise chains start repeating.”

Wall Street was not inclined to consider alternatives to the nineteen types. In 2002, Leinberger approached a mall REIT CEO with a plan to build a dense, mixed-use community next to the company’s flagship mall in Tennessee. The man rejected the idea out of hand because he feared a downgrade of the stock and investors calling for his head. He intended to stick to his knitting building malls instead.

But a funny thing happened on the way to the mall. On Leinberger’s list of the nineteen standard types circa 2006, the enclosed regional mall-as-we-know it wasn’t on the list. The last mall fitting that description opened that year, and there are none on the drawing boards. While the mall may not be dead yet, it’s lost the ability to reproduce—a sure sign of its extinction. That same summer, at the annual convention of the International Council of Shopping Centers in Las Vegas, a developer named Yaromir Steiner informed a packed house of his peers that “single-use environments,” i.e. the mall, “will disappear over the next thirty years”—the same amount of time that Dixie Square has already been decomposing.

This fear underlies last week’s $10 billion bid by Simon Properties Group—the country’s largest owner of malls and retail REIT—for its bankrupt rival General Growth Properties, which is saddled with $27 billion in debt. Analysis of the deal has dwelt on retrenchment and consolidation, the combined entity would own 30 percent of the nation’s shopping malls. “More important,” according to The Wall Street Journal, “it would own nearly half of the country’s 319 best-performing malls in terms of sales, giving it unmatched power over retailers and control over the look and feel of the shopping experience.”

By cementing a near-monopoly the best locations and the highest-grossing tenants, Simon is hoping to delay their inevitable decline. (Or at least milk these cash cows for all their worth.) But as Steiner predicted four years ago, the most lucrative “will be the last ones to die.”

What should replace them? The question occupies academics and developers alike. Steiner is a particularly interesting case. Born in Istanbul and raised in Toulouse, France, he now runs his own firm in Columbus, Ohio. Like the mall’s original creator, Viennese emigré Victor Gruen, Steiner sees himself trying to make American cities look more like the ones he grew up with. “Here in America, we’ve stopped building downtowns and town squares,” he told me once. “Where did our urban hubs go, and why did we get rid of them?”

Steiner created the first “lifestyle center” twenty years ago as a mixed-use alternative to the anchor-driven mall, and the formula—which uses New Urbanist elements—has replaced the mall itself on Wall Street’s list of the nineteen approved types (and Simon has proven to be an enthusiastic adopter). In Steiner’s hands, the lifestyle center has been refined to the point where it approaches actual urbanity, but the ubiquity of chain stores and their guaranteed revenue streams pierces the illusion. In the end, Steiner can only build what the banks will let him, and those are malls.

Paying for urban infill projects like Dixie Square is even harder. In Retrofitting Suburbia, the authors and architects Ellen Dunham-Jones and June Williamson devote three hundred pages to the morphology and practice of “incremental urbanism,” including ways to incorporate “nonconventional, community-serving tenants” such as libraries, community colleges and even churches into the mall. But they spend less than a page on the question of how to package this in a way Wall Street could get behind. They acknowledge that owners of dying malls in good locations would rather take their chances playing musical chairs with Simon and GGP in hopes of being one of the lucky 319 that survive until the final round.

In the meantime, the REITs that financed our landscape continue to lurch toward Armageddon. The volume of CMBS issued annually fell from $230 billion in 2007 to $3 billion last year. The Congressional Oversight Panel released a report last week on the fallout from the rising number of commercial mortgage defaults and concomitant bank losses. The report concludes that “a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.”

Dixie Square still awaits the wrecking ball. While the partners hope to begin next month, demolition will cost $5 million, and they’ve been unable to raise the cash to cover it. “There is no financing for anything like this,” their lawyer told the Chicago Sun-Times. It can wait a while longer.

[Photo by flickr user Allan Ferguson]