(Lee Chilcote) Retail is a notoriously tough business, and these days, malls seem to lose their luster within half a generation as consumers change their shopping habits and shiny, new competitors are built.
Yesterday’s Randall Park, Euclid Square and Rolling Acres — all shuttered Northeast Ohio malls that have inspired viral memes of pond scum-filled entryways and crumbling multiplexes, the fodder for Cleveland.com‘s #mallmondays and more than a few Scene slideshows — are today’s Richmond Town Square, University Square and Severance Town Center.
These three malls, located within just a few miles of each other, are distressed properties, to say the least. With the departure of Macy’s earlier this year, Richmond Town Square is effectively a ghost town, with only Sears and JCPenney remaining as anchor tenants. University Square, built with much fanfare in 2003 as Northeast Ohio’s first multi-story retail complex, is now empty except for Macy’s, Target and a few others. It’s currently being managed by a receiver.
Severance, which opened in 1963 as Ohio’s first indoor mall, was reinvented as an outward-facing shopping center in the late ’90s but could be approaching “dead mall” status just 15 years later, a sort of life expectancy unseen in the architecture world outside of sports stadiums and arenas. Walmart’s departure two years ago for the greener grass at Oakwood Commons in South Euclid sent the mall into a downward spiral. Severance is now 35 percent vacant and in foreclosure.
With retail largely overbuilt in Northeast Ohio, experts say the only way that malls can grow is to shuffle the pieces around on the checkerboard. That’s what’s happened with Oakwood and Severance. The result may be good, at least on a superficial level, for the community on the receiving end of the deal, but it’s bad for Northeast Ohio. When Walmart left Severance, it created about 85 low-paying jobs, transferred 200 jobs one mile down the road, and left behind a hot mess.
“There’s no way we can support all the retail we have, and there’s too much retail [in Northeast Ohio],” says Nathan Wynveen of Newmark Grubb Knight Frank, a commercial brokerage firm in downtown Cleveland. He cites the fact that retail vacancy rates in Northeast Ohio climbed from 7.5 percent in 2006 to 12.7 percent in 2012, though they recently dipped back down to 9 percent.
In many ways, it’s a tale of two markets. Class A spaces such as lifestyle centers are doing quite well, and Wynveen says discount retailers like Walmart are also still thriving. Middle-market retail, on the other hand, is being squeezed by online sales. That means that Class B and C shopping centers — like Severance — are on the wrong end of the economics. To be successful, they’ll have to reinvent themselves. In the future, they might not even be malls.
“A mall like Severance has a choice when found at a competitive disadvantage — either it’s got to grow and stay with the same basic format, or it has to morph, change into a different format, or it’s going to die,” says Roby Simons, a professor at the Levin College of Urban Affairs at Cleveland State University. “Unless you replace Walmart with a tenant of the same stature — and there’s a short list there — odds are it’s not going to remain the same format.”
Wanted: A developer with vision
The owners of Severance, Syndicated Equities out of Chicago, defaulted on a $43 million loan when Walmart departed the shopping center in 2013. The loss of Walmart triggered a rolling wave of rent reductions that were part of the lease agreements for other tenants in the shopping center. More recently, IHOP closed and Regal Cinemas decided against renewing their lease.
Severance is still anchored by Home Depot and Dave’s Market, both of which are locked into multi-year leases, as well as many smaller tenants. In recent months, four existing tenants, including Marshall’s, have renewed their leases. Still, the gigantic empty Walmart has left a gaping hole in the shopping center — the global retail giant represented 20 percent of the square footage there — and the old cinemas are surrounded by a cracked, sad-looking parking lot.
Keith Hamulak, vice president with C.B. Richard Ellis, the court-appointed property manager for Severance, says the news about the property is mixed. “The truth about Severance is there are several retailers there that are doing well, and there are retailers that are not doing well at all,” he says, citing Home Depot and Dave’s as success stories. “But the exodus of Walmart dumped 120,000 square feet back into the market and the back side of the mall needs to be repurposed.”
Space at Severance is leasing for approximately $12 per square foot for smaller spaces, $6 to $8 per square foot for medium spaces, and $4 to $6 per square foot for bigger spaces, Hamulak says. That’s a far cry from the $25 to $35 per square foot being obtained at suburban lifestyle centers and in some downtown Cleveland locations, but pretty typical for “second generation retail space.”
Hamulak has reached out to potential tenants about the former Walmart space, but he hasn’t yet landed a deal. Anchor tenants are typically loss leaders for a developer — meaning the owner doesn’t make money off them, but they help to lure smaller money-making tenants — but the formula doesn’t work here. With Severance, there’s simply no interest from smaller operators. There’s plenty of space to fill in the complex, but it’s languishing until a new owner is in place.
Colette Gibbons, court-appointed receiver of Severance and an attorney with the law firm Ice Miller LLC, says that a new vision for the shopping center is needed before desirable tenants will venture in. “High-end tenants and nicer restaurants are not going to make a move unless there’s an overall plan for the center,” she says.
“I think it has to be re-envisioned,” she continues. “It’s too big right now, and it’s not updated the way a lot of the lifestyle shopping centers are. It doesn’t have the amenities, like coffee shops, restaurants, green space and areas for kids to play. The people of Cleveland Heights would like a facility like this where they could head over on a Sunday and hang out for a couple of hours. They would like a nice development in the center part of their city.”
Perhaps the worst scenario would be if Severance hung on by its fingertips in its current dilapidated status. Yet Gibbons says there’s hope: Severance Town Center’s mortgage is currently for sale and there’s interest from developers. There are three possibilities: The note could be sold and the buyer could purchase it back from foreclosure, an entirely different note holder could purchase it at that time, or Gibbons as receiver could sell the note to a new entity. No one knows exactly which scenario will play out, yet one thing is needed above all else.
“They need a developer with vision,” she says.
You need but your own two eyes to see that there’s too much retail space in Northeast Ohio, yet the numbers help paint a broader picture, revealing with startling clarity why this is a regional crisis.
According to a 2007 study completed by professor James Kastelic of Cleveland State University’s Levin College of Urban Affairs, Northeast Ohio has a retail surplus of just over 22 million square feet. Between 2000 and 2007, the study shows, Cuyahoga County’s population declined by 6 percent while its retail space grew by 5 percent. Although the study has not been updated, several new properties have come online since it was completed, including Oakwood Commons.
Dead malls and overbuilt retail are a vicious national problem. “Since 2010, more than two dozen enclosed shopping malls have been closed, and an additional 60 are on the brink, according to Green Street Advisors, which tracks the mall industry,” reported the New York Times in a Jan. 3, 2015, article called “The Economics (and Nostalgia) of Dead Malls.”
Given the seismic shift that’s taken place in the retail world since Severance was redeveloped in the late 1990s, the shopping center was certainly vulnerable. Additionally, real estate insiders say the property was not well managed and its previous owners had a capital structure that did not incentivize putting new investment into the property. Now, with Oakwood, Cedar Center North and University Square minutes away, the shopping center will never go back to what it was.
Or as Wynveen puts it: “The strip mall is totally done.”
But what will Severance morph into? Townhomes? Offices? A sleek techie incubator? A vast eyeball-stretching indoor soccer complex? A suburban pot farm, if marijuana is eventually legalized in Ohio? No one can say — but some local leaders say keep an open mind.
“The future of Severance will require some mix of uses,” says Tanisha Briley, Cleveland Heights’ city manager. “We can have our wish list, and that’s all well and good, but the market dynamics will determine what can be sustainable. We want a vibrant, sustainable mix of uses at the site — it could be commercial, housing, light industrial or office.”
This spring, Cleveland Heights officials announced that they would like to work with the new owner of Severance to lift the use restrictions there. Due to provisions in the current mortgage, other uses — for example, turning Walmart into a rock climbing gym — are not allowed. “We can’t get rid of the rules until the new owner is in place,” says Briley. “We want to be helpful.”
She also says the city wants to work with the new owner to provide assistance that will make Severance viable in the future. Built-out cities like Cleveland Heights often use tools like tax increment financing and other public subsidies to make complex projects more feasible.
Simons has a specific projection: “Parts of the mall may stay, other parts may not. In the long run, I’d bet that half of that mall would go to housing. What choice does it really have?”
Vince Reddy, a project manager with LAND Studio who worked for the City of Cleveland Heights for nine years, agrees that Severance could become a new mixed-use neighborhood if handled proactively by the city and developer. “It could be much more bicycle and pedestrian accessible,” he says. “I could see a reworking of the street network, to bring the city’s street grid into that part of the mall, and create more of an actual neighborhood feeling.”
Deanna Bremer Fisher, executive director of the nonprofit advocacy group FutureHeights, says it’s important that the city reach out to citizens now to garner public input. To that end, the organization is planning to host a community forum on Severance’s future this fall.
Oakwood Commons: more stores planned
Down the road from Severance, Oakwood Commons is humming along just fine, anchored by the new, larger Walmart, complete with a full-size grocery store. Although only one additional outparcel building has been constructed so far, developer Mitchell Schneider of First Interstate says they will break ground on the rest of his project this fall.
“I’d say we’re halfway there, or maybe 60 percent of the way there,” says Schneider, who expresses some frustration at not being able to lure a single anchor tenant to occupy the large parcel adjacent to Walmart, which could accommodate a 135,000-square-foot retailer. Instead, he says, the parcel will be broken up to accommodate multiple retailers.
Schneider won’t comment on current tenant lease negotiations; yet according to the website for commercial brokerage Goodman Real Estate, national retailers HomeGoods and T.J. Maxx are slated to open here in 2016. Schneider also won’t say whether any of the new tenants will be lured from existing shopping centers. However, T.J. Maxx and HomeGoods are located at nearby University Square, and these stores have remained open despite the shopping center’s troubles. Common sense suggests these locations will be shuttered if the retailers move to Oakwood.
When Oakwood Commons was first proposed in 2010, it was considered an open secret by many people that Walmart wanted to move there. Schneider, citing negotiations, wouldn’t name the prospective tenants for the project, but claimed at least some would be new to Northeast Ohio. He says this is still true. “Assuming that we are able to conclude all of the lease negotiations we are currently engaged in, there will be retailers at Oakwood Commons that are new to the area.”
In First Interstate’s original application for zoning approval to South Euclid, the company maintained that the development of Oakwood Commons would actually strengthen surrounding retail areas. “Yes, I do think that’s still true,” Schneider maintains, despite the fact that Walmart’s departure from Severance accelerated the mall’s distressed state.
Walmart wanted to leave Severance anyway, Schneider says, because it wanted to open a larger supercenter with a grocery store. That trend has played out across the country for decades, leaving behind dozens of empty Walmarts that litter the suburban landscape. “Walmart was in a smaller store, and precluded by lease restrictions from selling food at that store,” says Schneider. “A critical part of its business is being a supermarket. I would say that Walmart was restricted from doing its primary business at Severance and needed to find a different location.”
Oakwood Commons was handily approved by South Euclid voters in 2011, and Schneider proclaimed in his original zoning application that the 325,000-square-foot center would generate about 400 jobs and $1.7 million in annual property taxes. A report prepared by Team NEO estimated that the Oakwood project would generate $460,000 to $523,000 in local income tax for South Euclid. However, four years later, there’s some question as to whether these promises will be kept.
This reporter requested an interview with South Euclid officials, who initially preferred to answer questions by email and text message. According to Keith Benjamin, director of community services for South Euclid, Oakwood generated $130,000 in income taxes last year. He adds that RITA is still collecting income taxes, and that number could go up. If the project is halfway done, however, it’s hard to see how that amount will ever reach $500,000. Benjamin remains “cautiously optimistic about the potential for future revenue generation.
“My hope, depending on who the retailers are at the site, is that it will generate as close to that $500,000 number as possible,” he adds. “Obviously, it depends on what retailers come in.”
In other words, Benjamin acknowledges that Oakwood could fall short of its projected revenues to the city of South Euclid — even though these were the numbers that were touted to voters.
The developer and city of South Euclid also failed to provide specific job numbers, although Schneider still claims that the project is on track to create 400 jobs. Yet if Walmart only created 85 new jobs when it opened here, simple math suggests that the project could easily fall short. Benjamin says that South Euclid has not been able to obtain specific jobs numbers for the project. “We went to Walmart and they wouldn’t release the numbers,” he claims.
Schneider himself seemed to tacitly acknowledge that Oakwood would steal jobs from Severance when Walmart announced it was moving in 2012. Back then, Schneider told the Sun News that the retail and retirement community he was planning for the Cleveland Heights portion of Oakwood would “create significant jobs so that the income tax revenues to the City of Cleveland Heights would more than make up for the Walmart jobs transferred to South Euclid.”
However, Schneider has since canceled that project, stating that he found it difficult to “engage” with Cleveland Heights officials. The property has been sold to the Hebrew Academy of Cleveland.
One reason why South Euclid officials were so keen on developing Oakwood is that they saw it as a revenue generator. At the time the project was proposed, state support for local government had been cut and the local economy was still suffering a post-recession hangover. Benjamin says that South Euclid was eager to develop new revenue sources given cuts in state support. Yet studies show retail development isn’t the best way for cities to develop their tax base.
“At the municipal level, retail isn’t really a big money maker for municipalities,” says Kevin Leeson, a planner with the Cuyahoga County Planning Commission. “Most property taxes go to the schools, sales tax goes to the county and the state, so the biggest chunk comes from income taxes, which generally aren’t real high in a retail environment [they’re low-paying jobs]. From a municipal tax standpoint, cities make more money in industrial and office development.”
On the plus side, Oakwood is served by public transit and has nice sidewalks and sustainably constructed buildings and landscaping. First Interstate preserved a lovely 21-acre portion of the former country club as parkland, contributing $400,000 towards creation of the green space.
Ironically, Schneider says he believes that Severance is “a fantastic piece of real estate that is and will be a part of the extended University Circle area. It could be a wonderful mixed use property.” He also says that he doesn’t plan on buying it anytime soon.
Master planning could help
Cleveland Heights’ new master planning process, which was funded this year by a grant from Cuyahoga County, could help the city to better prepare itself for the future, argues Bremer Fisher. One of the reasons the Heights portion of the Oakwood property was not developed as retail or housing is that “the city did not provide a master plan or framework to the developer.
“With Severance,” she adds, “there’s an opportunity to do it differently.”
There’s no silver bullet solution to overbuilt retail in Northeast Ohio, since our fragmented system of government and Ohio’s home rule provision ensures that communities are able to make many of their own land use decisions. A recent Northeast Ohio Sustainable Communities Consortium report showed that if Northeast Ohio continues on its current path, we will face “unprecedented challenges” by 2040, including property abandonment, jeopardized natural resources and fiscal challenges for local governments. Yet Bremer Fisher and others say cooperative planning is the first step cities can take to think beyond their own borders.
“We’ve gotta start thinking regionally, and that’s beginning to happen,” says Glenn Coyne, executive director of the Cuyahoga County Planning Commission. “Downtown areas are seeing rebirth, and the outer ring suburbs are still fairly strong. It’s what’s going to happen in between … . We need to take a look at how cities like Cleveland Heights and South Euclid develop.”
Some Heights activists are less optimistic. “It’s completely predictable,” says Fran Mentsch, who led the Citizens Against Oakwood group. “Oakwood is a huge lost opportunity.” She and others argue that the decline of Severance will further contribute to the challenges facing Cleveland Heights, which already struggles with blight. The city lost 8 percent of its population from 2000 to 2009 and the poverty rate has spiked to 18 percent, a whopping 7-point increase. Cleveland Heights will also likely place an income tax hike on the ballot this fall.
According to Coyne, only 17 of the 58 communities outside Cleveland that are part of Cuyahoga County have master plans that have been updated within the past 10 years. The rest have no master plans at all or out of date plans. The county has funded four cities — Cleveland Heights, University Heights, Olmsted Falls and Parma Heights — to complete master plans this year.
“For communities that make planning a priority, we want to help them,” says Coyne. “If a community has a master plan that’s up to date, and they get a development request or a zoning request, they’re in a much stronger position to react to it than if they don’t.”