Coming to a mall near you in 2018: Craft brewers, children's theaters, gyms and other unorthodox uses

Key Points
  • Malls are getting makeovers in 2018.
  • Some retail landlords don't have a choice, as department stores fire off store closure announcements and as countless other specialty tenants file for bankruptcy.
  • Simon Property Group, the largest U.S. mall operator, spends roughly $1 billion annually to renovate its assets.
Customers on the escalator at Macy's in New York.
Getty Images

Malls are getting makeovers — so much so they might not be called malls anymore, or you might do a double take next time you stroll through one.

U.S. retail landlords including Simon Property Group, General Growth Properties, Macerich and Taubman, which own some of the most profitable malls in America, are focused on redeveloping their properties and ditching antiquated occupants in the coming months.

To be sure, many of these property owners don't exactly have a choice. As department stores including Sears, Macy's and J.C. Penney fire off store closure announcements and as countless specialty apparel retailers file for bankruptcy with plans to shrink their physical footprints, real estate investment trusts have to find replacements elsewhere, and quick.

"We've weathered lots of storms one way or another," Simon CEO David Simon said on a recent conference call with analysts and investors, discussing retail's rough ride in 2017.

"We'd certainly love a better natural retail environment," Simon added. But in the meantime, the company is working on "diversifying away from the have-nots to the haves."

Take a look at Simon's King of Prussia mall outside Philadelphia, which the company likes to call its "Hudson Yards" (a major development being done in New York) for suburban America. This is also notably one of the top-performing malls in the country, according to Green Street Advisors.

There, the REIT is planning to fill a vacated Penney store with mixed uses such as hotels, apartments and office spaces, which could ultimately hike the asset's value by more than $1 billion, according to Simon. The specific incoming occupants have yet to be formally announced.

Nowadays, Simon said, it spends about $1 billion annually to renovate its malls. In signing new leases, the REIT has reduced its exposure to apparel tenants — the biggest headache on many company's directories — by about 20 percent and has added 20 percent more food and entertainment businesses.

"I think, as things have changed, we now consider ourselves as a — we're going to have more mixed use opportunities," Simon told investors. "But we're not running away from the mall business."

Since 2014, 90 regional malls have spent more than $8 billion on property renovations, according to investment management company Jones Lang LaSalle. Meantime, 16 percent of mall landlords have admitted to spending money on "de-malling," JLL found, opting to call their refreshed assets "shoppes," "villages" and "towne centers."

In 2018, that spending and those modifications are only expected to climb.

Starwood Retail Partners, a Chicago-based, privately held landlord with 30 properties, is in the midst of a $125 million renovation project in Plano, Texas, which will open in phases next year. Once completed, The Shops at Willow Bend will include a children's theater, an Equinox gym and one of only four Crayola Experience locations in the country.

Starwood is also bringing in more local and celebrity chefs, which CEO Michael Glimcher told CNBC is what more and more consumers want — something more exclusive than a traditional Cheesecake Factory or Shake Shack.

In Salinas, California, Starwood is also making changes to Northridge Mall in the space of a former Penney store, which was relocated to another part of the property. The new complex will include a bowling alley, karaoke booths, arcade games and billiards, and will offer alcoholic beverages. It's something kids and adults can get excited about.

"Next year, everyone will be looking for newness," Dana Telsey, Telsey Advisory Group CEO, told CNBC. "Online retailers are testing physical in small ways, ... [and] I think you're going to see more services coming to shopping centers, and we'll see how that progresses."

Recent replacements she's noticed include a massive Wegmans grocery store taking over a vacated mall spot in Boston, ride-hailing service Uber opening waiting lounges at Westfield's Century City shopping center near Los Angeles' Santa Monica Boulevard, and walk-in medical clinics (even doctor's offices) taking over empty mall space.

"The immediacy of how [mall landlords] do this is key," Telsey added.

In a push to lure more shoppers indoor, retail REIT Washington Prime Group just last month opened its first craft brew pub, Redemption Alewerks, at Munice Mall in Indiana, and expects to open more such locations next year.

"A little common sense and regression analysis will tell you we need more home, food and beverage, and entertainment options," WPG CEO Lou Conforti told CNBC in a recent interview.

WPG also recently launched at some of its malls a rotating pop-up hub for online retailers, known as Tangible, its own candy store (Shelby's Sugar Shop) to replace lackluster vendors, and music listening lounges in a partnership with Interscope Records. Like some of the other major retail REITs, WPG has growing partnerships with the likes of Amazon and Tesla to open lockers and supercharging stations at its malls.

"We have to do a reality check on what we want," Conforti said. "It's incumbent that we just do this stuff ... to redefine physical retailing."

Pennsylvania Real Estate Investment Trust (or PREIT), a smaller landlord than the likes of GGP and even CBL Properties, is making changes that include swapping Sears for Burlington, HomeGoods and Five Below stores at Magnolia Mall in Florence, South Carolina. A Whole Foods will replace a shuttered Kmart at Exton Square near Philadelphia. And a Tilt Studio (an arcade attraction for kids), along with a gym, will soon replace Macy's at Valley Mall in Hagerstown, Maryland.

"We talk about diversifying our tenant base. ... We're referring to reducing our reliance on traditional mall retailers, including department stores, apparel and accessories," PREIT CEO Joe Coradino told analysts and investors last month.

"Malls in particular are undergoing the renaissance" in a "new age of retail," he added.

According to commercial real estate tracker CoStar, the share of space occupied by nonretail tenants at regional shopping malls climbed to about 13 percent in 2016, up from 10.5 percent in 2012. With more projects like Simon's King of Prussia redevelopment underway, that percentage should continue to climb.

Meantime, mall owners can only hope their stocks might climb in tandem after being beaten down for most of the year.

A recent (but not complete) bid for GGP by Brookfield Property Partners, a takeover of Australian-based Westfield and increased activist activity in Taubman and Macerich have boosted the industry's shares slightly on all the chatter, but there are still ample losses to be regained.