Is Affordable Housing the Next Play for Vacant Malls?

For decades, the mantra was “Long live the American mall!”  These dreamy retail hubs were once bustling scenes of activity, fun, and commerce. If you needed to shop, you went to the mall. There was no question, no contest, and no real competitors. The mall was the Golden Child of the U.S. retail footprint.

Enter the Internet stage left…  Now that individuals have the luxury of shopping from home with just the click of a mouse, today’s mall scene has turned bleak. While already on life-support, 2020 delivered a proverbial sucker-punch to traditional brick and mortar retail.  COVID-19 and the resulting economic fallout and lack of consumer spending power put the nail in the coffin of many once successful suburban shopping malls.  The vacancy rate of malls reached the highest point in 2 decades during 2020.  It is estimated that more than half of all U. S. department stores in malls will be dark by the end of 2021 and surviving retailers will likely not be far behind.  Once massively successful brands are skipping rent payments and vacating previously prominent retail storefronts and the trickledown effect is leaving landlords in a precarious financial situation. 

While shopping centers with a fresh spin may hold promise for some commercial real estate, there’s no doubt that the massive square footage currently occupied by dying mall spaces must be reconfigured.  CMBS lenders with little flexibility fear a rush of landlords looking to restructure or defer debt. Delinquency and subsequent default are already on special servicers radar.

A New Future for Mall Spaces

In 2020, the Trump Administration floated the concept of converting the overabundance of empty mall space into affordable housing.  According to Fannie Mae, it is estimated that across the United States there is an affordable housing shortage in excess of 2.5 million units.  Given this deficiency, developers need to examine every possible opportunity to satisfy the growing demand. 

Minus zoning hurdles and bureaucratic red tape, the American mall is an excellent target for this type of adaptive re-use project. The Federal government recently publicized their prospective plans to convert retail spaces into residential communities. Transitioning empty storefronts into micro-apartments would flood supply into metropolitan markets, helping to ease the housing shortages plaguing cities all around the country. Conceptually, this plan would convert vacant mall space into mixed-use projects with affordable multifamily as the “anchor tenant” of sorts. 

With the US Department of Housing and Urban Development (HUD) and state housing development agencies on board, after a few alterations to the physical space, failing malls could easily be retrofitted into attractive affordable housing options.

Heidi C. Adams, a Senior Investment Advisor with NAI Koella | R M Moore in Knoxville, feels that by their very nature, malls make strong prospects for affordable housing. According to Adams, “Malls are in centralized areas that are geared around attracting traffic and remaining accessible. To accommodate changing tenants, the units are easy to renovate. Malls are also built around public transit options, making transportation a key benefit of these locations. All criteria required by HUD and local housing agencies for affordable housing developments.”

Paving the Way

As HUD and local agencies look to the future and formulate Qualified Census Tracts and bond and tax credit incentives for affordable housing developers, Adams speculates that vacant malls that fall within the geographic parameters will score high, opening the door for more community minded development. 

As the commercial real estate market continues to evolve, we will keep an eye on the progress of this trend – it may well be one of the biggest areas of opportunity in 2021 and beyond.