Pacific Retail Capital Partners is loaded up in a hard-hit sector, with 10 malls in its portfolio and digital disruption of brick-and-mortar retail in full gear.

But the El Segundo-based real estate investor doesn’t feel stuck.

Most of its malls – eight traditional indoor properties and two outdoor “lifestyle centers” – are class B properties.

Yet the privately held outfit isn’t dismayed by experts’ predictions that hundreds of malls around the U.S. will close over the next five years or so.

Pacific Retail is busy getting on to the next thing for its retail centers, many of which will transition to new uses such as residential and office space, entertainment venues and service providers such as medical clinics.

It’s a shift many mall owners are starting to make as they rethink a decades-old, apparel-heavy model of department store anchors surrounded by smaller retailers that represented their bread and butter.

“You’re going to see a continued focus on designing a space not just for shopping, but that has a multiplicity of uses that are complimentary,” said Steve Plenge, Pacific Retail’s managing principal.

The firm has acquired its retail properties in several deals over the past five years, and pegs them for a total value of about $2 billion. Most of them are class B malls, with annual sales of $400 to $425 per square foot for non-anchor tenants, he said. Two of their properties, the Paseo Nuevo in downtown Santa Barbara and Tivoli Village in Las Vegas, are classified as class A, with more than $500 in sales per square foot among smaller tenants.

Class A malls are considered the likely survivors of the ongoing retail shakeout (see related coverage, page 5; Commentary, page 40).

It’s the B malls where Plenge sees new opportunities.

So do others, including Ron Friedman, a Century City-based retail expert and partner in the accounting and advisory firm Marcum in New York.

“There’s about 900 malls in the U.S., and 300 are expected to close or go away, probably in the next three to five years,” Friedman said. “The malls that completely remodel will probably gut (anchor box buildings), get rid of them, or turn them into much smaller units.”

Density key

Plenge calls the process “densification.”

“The main thing when you’re looking at mall properties is how to ‘densify’ them,” Plenge said. “Some markets will have multi-family (development at the mall), and there is going to be office (space). Another thing that we’re paying attention to is (the potential for) medical office space. They will be somehow integrated to the overall site plan. You’re going to see a lot more densification and a mix of uses coming on to these properties.”

Many regional malls, Plenge said, sit on properties up to 100 acres in the heart of communities, and their sprawling surface parking lots can accommodate additional development, including residential uses. Residential builders are eyeing B properties for multifamily development, Plenge said.

A key to Pacific Properties strategy will be to match the renovated malls to their new residential neighbors.

Housing demand holds the potential to switch a B mall to an A quickly, generating revenue and creating a built-in customer base, Plenge said.

Pacific Retail Partners is already in the works on a plan to add multifamily residential units to the Yorktown Center in owns in Lombard, Ill., near Chicago. Pacific Retail acquired the mall in 2012. About five acres within the property was re-entitled from office to residential and sold to Greystar Real Estate Partners of Charleston, S.C.

Plenge said Greystar plans to build more than 900 residential units, some of which are currently under construction.

“People today want to be near retail and entertainment,” Plenge said. “The convenience and location of these residences appeals to a cross-section of the population, from young professionals to retirees.”

‘Captive audience’

Joshua Levy, a managing partner with Pasadena-based Arbor Realty Capital Advisors, which is involved in mall redevelopment projects nationwide on an advisory basis, said mall owners are increasingly attracted to building residential and office space.

“It provides for a population, which allows the mall operators to find new tenant uses and increase their rent because of that captive population,” Levy said. “A denser population allows the mall operator to find new tenant uses and increase their rent because of that captive population.”

Residential development can also be built vertically above anchor boxes vacated by a department store or on the available land used for parking lots, Levy said.

“I think that these mall operators are realizing that they’re in a contracting business and as they need to attract … equity dollars to redevelop their mall properties,” he said. “I think they’re realizing that they’re sitting on these open-air parking lots and they have a lot of valuable air rights, meaning the zone laws have changed to allow them more vertical type density.”

Industry watchers also have called attention to the increasing emphasis on food and entertainment-based tenants inside malls. Cinemas and food halls are increasingly replacing department stores as draws for customers as well as smaller retailers deciding to lease at the mall, analysts said.

In Los Angeles the most prominent example of this is the Westfield Century City mall, whose owner, Sydney-based Westfield Corp., last week officially unveiled a $1 billion renovation that includes a greater focus on restaurants, common gathering areas and an experiential approach (see coverage, page 3 and 5; Commentary, page 40).

Outside the box

The Shops at South Town property in Sandy, Utah, is an example for Pacific Properties’ bid to reinvent the mall near Salt Lake City.

It hired Downtown-based architecture firm Gensler to completely redesign a former 220,000-square-foot, two-story box anchor building there.

“For years, we’ve never been able to touch the box, which historically have been fortress-like in nature and inward focused,” said Annmarie Brintnall, a principal at Gensler and firm-wide leader of shopping centers. “They were only focused on apparel shopping. Basically what we’re seeing for the first time since the invention of the retail center is we have an opportunity to reinvent and reposition what these anchors are for and take them back to their original intent, which shopping centers were really the community hub or the town hall.”

The anchor box building at the Shops at South Town once housed the department store chain Dillard’s. It will soon see Japanese amusement center chain Round One Entertainment open there, along with other tenants, Plenge said.

“For the first time, we’re allowing anchor boxes to open up to the outdoors and allow lots of natural light to penetrate through the space,” Brintnall said of Gensler’s redesign efforts throughout the country. “We’re introducing different types of venues, primarily entertainment-based with a collection of restaurants.”

Nick Duerksen, economic development director for Sandy, said he’s hopeful Pacific Retail will succeed.

“I think what’s been impressive is they had a very good plan,” Duerksen said. “What they’ve done is bring in other types of activities and experiences. That’s probably the number one thing. It’s been an experience rather than simply a place to shop.”