The Great Mall Makeover : Real estate: Stores are being turned into churches, museums and residential housing as a glut of retail space forces alternate uses of unneeded shopping centers.

The Beau Monde Mall in suburban Denver was one of those shopping centers tailor-made for the “shop-till-you-drop” 1980s.

Outfitted with rustic tile floors, wide brick arches and black wrought-iron lampposts to resemble a quaint European village, the $34-million center had grandiose plans to offer residents of its tony neighborhood an assortment of fancy boutiques and fine restaurants.

But then the bottom fell out of the Denver economy, and the mall never filled. By 1989, the Beau Monde was on the auction block, where it was snapped up for $6.5 million by the ministry of Marilyn Hickey, a local TV evangelist who needed new headquarters for her 3,000-member Happy Church.

The transformation from temple of consumption to just plain temple was remarkably easy. A boutique, once entirely devoted to cosmetics, became a 300-seat chapel. A former French restaurant now houses a phone-in prayer center. The old Ann Taylor store is the ministry’s art and publicity office. And a space once reserved for a department store is now the congregation’s main sanctuary.

“It works great so long as you don’t need stained-glass windows to feel like you’re in church,” shrugs publicity director Karen Cutler.

An increasing glut of retail space--the result of a decade-long boom in new shopping center construction followed by a sharp downturn in consumer spending--is driving what many real estate and retailing experts predict will become a rash of conversions of unneeded stores into more productive uses.

And nowhere, say the experts, will these transformations be more evident than in Southern California, one of the most “over-stored” regions in the United States. According to a Times marketing research survey, mall space in Los Angeles, Orange, Riverside, San Bernardino and Ventura counties jumped 33% from 1980 through 1991, a figure that does not take into account grocery stores, auto dealerships, strip centers or free-standing stores. Meanwhile, per-capita taxable retail sales, after adjustment for inflation, declined 14.7% over the same period.

An empty Buffums store in the Lakewood Mall will soon be converted to a multiplex theater. A former downtown dime store in Riverside now houses the University of California’s photography museum. In Fountain Valley, a neighborhood shopping center was demolished to make way for new homes. And in Anaheim, city officials and landowners are wrangling over what to do with Anaheim Plaza, an aging center anchored by an empty Robinson’s and a Broadway that is scheduled to close within the next year.

“We are clearly at the beginning of a move toward recycling retail space,” says Carl Steidtmann, vice president and chief economist of Management Horizons, the retailing research division of Price Waterhouse. “We built so much retail space that we can’t absorb it. The choices are to turn it into something else--or let it sit empty.”

Wringing out excess retail space--by some estimates the nation has 35% more retail space than it needs--will be a painful process, and few Americans will be able to escape the consequences.

The operations of retail space owners, managers and developers, including such big names as Hahn Development Corp., Edward J. DeBartolo Corp. and Melvin Simon & Associates, are being pinched by a wave of bankruptcy-related store closures and escalating pressures from remaining tenants for rent reductions.

The real estate portfolio values of pension funds and insurance companies, which have traditionally been major investors in shopping centers and malls, are in danger of dropping, a potential problem to generations of retirees.

Meanwhile, cities and states, which have come to rely heavily on the sales tax generated by retail sales, are nervously watching as their largest source of revenue slowly shrivels and they are forced to cut public services--a reason many local governments are reluctant to approve redevelopment projects that recycle retail space into other uses.

“Retailing is undergoing some significant changes that are a lot more than the passing fads of a recession-weary or shopped-out consumer,” says Leonard Berry, director of the Center for Retailing Studies at Texas A&M; University. “The result is that every industry connected with retailing will feel the pinch.”

That America was in danger of becoming over-stored had been predicted for the better part of the last 15 years by analysts, who watched as regional malls, so-called power centers, strip centers and newly redeveloped downtown shopping areas sprang up throughout the country’s cities and suburbs.

According to the International Council of Shopping Centers, shopping center space over the last decade in the United States rose 39%, from 13.1 square feet per capita in 1980 to 18.2 square feet per capita by 1990. Meanwhile, spending at the nation’s shopping centers during the same period rose just 7.4% after adjustment for inflation.

But any indications that an ominous trend was in the making were largely ignored by expansion-minded retailers, generous lenders and ever-willing land developers.

Tax incentives in effect from 1981 to 1986 encouraged office and commercial projects, many of which justified their economic viability on the tax shelters they offered investors, rather than a community’s need for them. At the same time, retailers moved aggressively to win a share of the billions of dollars being thrown around by the baby boom generation as its members moved into the work force and began to set up housekeeping and start families.

Meanwhile, local governments anxious to retain or even expand their precious sources of sales tax revenues began bidding against each other to lure new shopping centers. Many cities offered tremendous incentives and subsidies to retailers and developers agreeing to open local outlets. And many retailers took the bait.

However, when the recession hit, so did the full impact of the previous decade’s excesses. And now, with their blinders off, retailers and their master builders are discovering--often quite painfully--that where and how Americans shop has undergone some fundamental shifts independent of the economy’s downturn, movements that together signal a dramatic decline in the amount of retail space needed to satisfy the nation’s consumers.

Perhaps the largest of these shifts is the recent full flowering of the so-called “category killer” stores, such as Toys R Us and Home Depot, as well as the proliferation of “power centers,” the developments built to house the category killers and their closely related cousins, the warehouse clubs, such as Price Club and Costco, and the super-discount stores, such as Wal-Mart.

According to Alfred Gobar, a real estate consultant in Placentia, category killers and discount clubs displace many times their equivalent square footage of traditional retail space.

For example, he says, a 100,000-square-foot Price Club can easily generate $120 million in annual sales, or $1,200 per square foot. That is the equivalent of 800,000 square feet of traditional space in the average regional mall where sales are about $150 per square foot. Home Club, Home Depot, Circuit City, Silo, Costco and all the other super emporiums, Gobar says, have a similar effect on traditional hardware and stereo equipment stores.

“Why do you think Leo’s Stereo, Pacific Stereo, National Lumber and Ole’s are no longer around?” Gobar asks. “These super stores and category killers are the black holes of retail. They are sucking up retail dollars, and there are only so many shopping dollars to go around.”

Another major shift in consumer preferences is the growing popularity of outlet centers, where manufacturers offer their over-stocked inventory and distressed merchandise, often at deep discounts.

In California, where all but one of these centers has opened within the last four years, sales are running more than $250 per square foot, according to trade industry reports, a level beyond even the $220 per square foot that analysts say is generated at South Coast Plaza in Costa Mesa, considered to be among the nation’s premier regional malls.

Not only have these new retailing concepts driven established retailers into bankruptcy in record numbers--there were 15,300 retail bankruptcies in 1991 alone, compared to less than 13,000 in 1990--they are one of the principal reasons many financially sound retailers, such as Sears, Roebuck & Co. and Woolworth’s--are closing hundreds of their poorly performing outlets.

But whether spurred by bankruptcy or the need to streamline, the result is the same: an increasing number of vacant mall spaces and storefronts. According to New American Network, a national real estate group, the commercial vacancy rate nationwide is now running 12.4%, a post-World War II record.

“I joke that ‘Vacancies R Us’ is the major tenant on Ventura Boulevard these days,” says Richard Carter, an agent with Beitler Commercial Realty in Sherman Oaks.

Delinquency rates on mall mortgages are rising too. According to the American Council of Life Insurers, whose members provide a major source of financing for mall developers, retail mortgage delinquencies for the third period of 1991, the last period for which data is available, stood at 4.3% of all outstanding mortgages, double the 2.16% figure from the prior years.

The upshot of all this, says William Doyle, a vice president of Hahn Co. in La Jolla, is a slowly dawning awareness among landlords that they are going to have to find new uses for their malls and shopping centers.

It’s already happening at Hahn’s Fashion Island mall in San Mateo, about 20 miles south of San Francisco. When the center opened in the 1970s, it had four anchors, including Liberty House, which has long since gone out of business, and Bullocks, which closed its Northern California operations more than a decade ago.

Now, left with just a J. C. Penney and a Montgomery Ward’s as anchors, Hahn is redeveloping the former 150-store mall and converting 40% of the area into new home sites. “It’s a nice piece of property,” Doyle says of the land, which sits on the edge of San Francisco Bay. “Unfortunately, it’s got a mall on it.”

Other mall owners know the feeling.

In Long Beach, Bank of America is desperately trying to sell the defunct Marina Pacifica Mall, a 15-year-old center that was once home to an assortment of apparel boutiques, gift shops and trendy bars. Now the mostly vacant center, which is held in receivership by Bank of America, houses a rape crisis center and leases rehearsal space in an old linen store to the Long Beach Opera. Student band members from nearby Cal State Long Beach use a former health club for their practice sessions.

“Who knows what will happen here,” says Elizabeth Leonard, an assistant mall manager. “Do you know anyone who wants to buy a mall for $20 million?”

In Kingwood, Tex., just north of Houston, the bank holding a newly completed but vacant discount shopping center found an unlikely group of buyers: doctors and hospital investors.

Last May, the 335,000-square-foot center became the Kingwood Medical Plaza. A 120-bed acute-care hospital and a 36-bed rehabilitation hospital have moved into the spaces once reserved for the two anchor department stores. Along the mall corridors between the two hospitals, an area once slated for boutiques, are the doctors’ offices and the hospital gift shop and beauty parlor.

“It’s not real normal,” says a hospital official, “but it works out just great.”

Doyle says that the wave of bankruptcy reorganizations and store closures is leaving landlords without the deep reservoir of tenants to which they have become accustomed. And the list of tenants is about to get even thinner.

Macy’s, which operates Bullock’s and I. Magnin as well as its flagship chain, is already closing stores throughout the nation just two months after filing for bankruptcy reorganization. Carter Hawley Hale, the parent of the Broadway stores, which will emerge from bankruptcy reorganization later this year, will be closing as many as 12 stores within the next year.

“What will happen to these stores?” asks Jack Kyser, chief economist with the Los Angeles Economic Development Corp.

To be sure, some will be filled by department stores that are continuing to expand, a list that includes Dillards, May Department Stores, Nordstrom, J.C. Penney, Montgomery Wards and Saks Fifth Avenue. Other retail space will be filled by the fast-growing mega-store chains, such as Target, Wal-Mart, Price Club and others.

But much of the existing vacant space is not useful to these expanding retailers because it’s too small, doesn’t have enough parking or isn’t in the right location.

“I think 10% to 20% of the mall vacancies will never be filled,” Doyle says. “And in the next two years, I think we’re going to see the wholesale conversion of major malls into other uses, because there are just not enough department stores to go around anymore.”

In downtown San Antonio, the owner of the former four-floor, 500,000-square-foot Goskies Department Store is considering turning the upper levels into 60 apartment units to satisfy a tremendous demand for residences near the historic Alamo and urban waterway. One floor has already been converted into a seven-screen theater complex. Meanwhile, retail space has shrunk to 165,000 square feet on the lower levels.

But some governmental agencies aren’t about to let their precious retail space slip away without a fight.

In Anaheim, city officials have made it clear that they will not approve any plan to tear down Anaheim Plaza, a 37-year-old mall with 30 of its 71 stores vacant, and convert a portion of the land into home sites. Instead, city officials are pushing the mall owners, the State Teachers Retirement System, to convert the plaza into another “power center” and add some entertainment spots.

“Although the pension fund could get a better price for the land from a residential builder, the city of Anaheim desperately needs to increase its sales tax revenues; they are the lifeblood of any city,” says Daniel Donahue, chairman of Donahue Schriber, the company developing the mall on behalf of the teachers’ fund. “Cities have only so much retail space and they won’t let you get rid of the engine that drives it.”

But another power center? Kyser wonders. With one already a big success in nearby Tustin and another just a few miles away in a converted mall in La Habra, Kyser raises the next obvious question:

“Are we just trading one type of glut for another and just shooting ourselves in the foot? After all, how many times do you have to go to a Home Depot or Price Club?”

RECIPE FOR A GLUT

Since 1980, the square footage of retail space in malls in Los Angeles, Orange, Riverside, San Bernardino and Ventura counties grew 32.9%, while taxable retail sales per capita after inflation declined 15.2%. The result is a glut in retail space in Southern California.

Available Space in Regional Malls 1980: 49.589 Million Square Feet 1992: 65.621 Million Square Feet

Retail Sales 1991: $5,211 Per Capita Sales Source: Shopping Center Directory, Los Angeles Times and U.S. Dept. of Commerce, U.S. Bureau of Labor Statistics, L.A. Economic Development Corp.