July 17, 2019

Mall owners fill empty stores with offices as coworking expands

Mall owners fill empty stores with offices as coworking expands

The Barney’s at the Scottsdale Fashion Square mall in Arizona that’s sat empty since 2016 is finally getting a new tenant and it isn’t exactly selling shoes.

In Scottsdale and elsewhere across America, stores once occupied by now-bankrupt retailers like Toys R Us and Bon-Ton are being converted into office space. Shopping mall owners are increasingly turning to unconventional tenants to fill some of the estimated 200 million square feet of retail space that’s closed or is expected to close since the beginning of 2017.

Malls in particular are under pressure when they are handed back much larger locations from department store operators like Sears, J.C. Penney, Macy’s and Hudson’s Bay, since there are few retailers, if any, still growing at that same size and scale.

U.S. mall owner Macerich is the latest to build on the trend and is teaming up with coworking giant Industrious to bring shared office spaces into its shopping centers. Industrious, which is taking over the former Barney’s location in Scottsdale, provides office space to multiple companies and entrepreneurs that rent individual offices while sharing common areas like conference and break rooms.

Coworking space is predicted to grow at retail properties by an annual rate of 25 percent through 2023, according to a new report from commercial real estate service provider Jones Lang LaSalle. Shared office space is expected to account for roughly 3.4 million square feet of retail space by then, JLL found in surveying 75 different coworking locations at malls, strip centers and within street-level retail shops across the U.S.

Macerich marks the first mall owner to land a multi-property deal with a shared-office space provider. Industrious has roughly 50 locations today in 33 cities across the U.S. Other popular coworking businesses popping up around existing retail centers include Regus and WeWork, which is starting to lease space from Hudson’s Bay’s Lord & Taylor.

Macerich CEO Art Coppola said his goal is to create “top-tier, built-in amenities for today’s professionals” at its malls, which include Tyson’s Corner in Virginia and Scottsdale Fashion Square in Arizona. Industrious’ first mall location is set to open in Scottsdale in January, with a wider rollout to follow.

“We feel very confident that integrating coworking into retail will be a slam dunk in urban areas,” Jamie Hodari, CEO of Industrious, told CNBC. “I think it’s pretty clear based on the demand analysis that we’ve already done that this will be successful.”

A few of the other major mall operators in the U.S. like Unibail-Rodamco-Westfield and GGP have already started experimenting with coworking in the mall, just at a smaller scale than Macerich is planning.

A start-up called Cowork at the Mall is taking the empty Sports Authority in Chicago’s Water Tower Place mall that’s sat vacant since 2016. Owned by GGP, the 15,000 square-foot space will include shared offices, event space and an area for up-and-coming brands to market new products. It’s set to open later this year in the fall.

Meanwhile, in San Francisco, Westfield’s Center on Market St. now rents space to a coworking company called Bespoke. This location, unlike some other coworking options, is geared toward businesses looking to grow in retail and tech. In New York, Westfield has brought WeWork into the Fulton Center shops, an extension of Westfield’s World Trade Center.

“There are intense benefits to the density of being in a space that is both commercial retail and close to residential,” Adam Pittenger, founder and CEO of Moved, told CNBC. Pittenger has been working out of WeWork’s Fulton Center location since June of last year, where’s he’s managed to grow his business from no other employees to more than a dozen.

“Living in the era of ‘on demand,’ we all want things now,” Pittenger said. On his walk into work each day, for example, he passes an Apple store, a Moleskine kiosk, a Shake Shack and a handful of other retailers and coffee shops that he frequents. “Everything that I need is here … and there’s instant gratification.”

The idea for some mall operators is that these coworking spaces will serve as incubators of sorts for new brands that could eventually run stores of their own within those same properties. More and more, real estate landlords are looking to have strong, if not exclusive, relationships with younger brands just starting to grow.

As Industrious grows in Macerich’s malls, CEO Hodari said he even envisions more established retailers — like a Nordstrom — will become tenants and hold their team meetings there, instead of in tiny back offices within their stores. “This could end up being really exciting for retailers, too,” he said.

Retail real estate analysts agree there is a lot of appeal in bringing more coworking uses into retail. As tenants, coworking companies are typically signing normal- to longer-term leases, and these deals promise to bring more foot traffic to the property.

“We are finding in general that these retail spaces have all kinds of amenities that workers want,” said James Cook, the director of research at JLL’s Americas division. “You can meet up with people, you have places to run errands, and you can grab a bite to eat. … I think in many cases it makes sense.”

JLL has estimated that by 2030, roughly 30 percent of all office space will be some sort of coworking arrangement. Millennials in particular are viewed as leading the move toward more shared products and resources.

“I don’t think these are one-off deals,” David Ruddick, Westfield’s executive vice president of leasing, told CNBC. “I think the [coworking in retail trend] will continue, and we will be an extension of the community. … This is the future.”

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