Retail Perspectives - Practical Tips

Waiting for Bluer Skies:
The Differences between Open-Air and Enclosed Shopping Centers during COVID

The COVID-19 pandemic has significantly impacted the retail sector.  Stay at home orders and similar governmental regulations have affected the industry in many ways.  In the beginning, governmental orders required non-essential businesses to cease operations to varying degrees.  Some orders required (and continue to require) certain businesses and shopping centers to remain closed for interior customer use.  Some regulations, over time, loosened to the point that businesses (especially restaurants) were permitted to open and operate by serving customers outside, in patio areas or other temporary exterior serving areas.  Other regulations and orders evolved to permit the gradual re-opening of stores, including by permitting in-store customer occupancy, subject to limits and conditions aimed at controlling acceptable and agreed upon risk levels to prevent the spread of the virus. 

Based on our observations, we have found that the degree of the relaxation of the original retail store closure orders largely depends upon the location of the particular centers/projects.  As cases declined in certain States and counties, rules and regulations changed and relaxed accordingly.  In addition, stores in open-air shopping centers seem to have an advantage over those in enclosed malls, because many jurisdictions allow stores in open-air centers to conduct limited in-store business, while enclosed malls are still largely prohibited from opening for regular customer use.  When possible, landlords may be interested in converting their enclosed projects to open-air concepts to take advantage of these benefits.

The Benefits of Open-Air Locations

Due to their nature, open-air shopping centers tend to have more exterior common, gathering, communal and/or open areas available within their boundaries.  Therefore, in circumstances in which State and local governments prohibit or restrict the operation of in-store retail and/or restaurant operations, the landlords of open-air shopping centers are able to provide more alternatives than enclosed malls for alternative exterior operations.

For example, in many jurisdictions, restaurants are still prohibited from serving customers within their premises.  Their only option is to serve customers in exterior locations (such as patio areas, sidewalk locations, common areas or other temporary exterior locations within the center) or using take-out or pick-up service.  The landlords of many open-air centers have been creative and flexible with tenants in allowing them to use many exterior portions of shopping centers not previously used for outside dining, in an effort to help these retailers save their businesses.

In addition, many jurisdictions still restrict and limit the operation of enclosed malls, by significantly limiting and/or prohibiting in-store shopping.  The same rules do not tend to apply to open-air shopping centers.  In open-air centers in many jurisdictions, retailers are currently generally permitted to operate with in-store shopping, although subject to some conditions, aimed at limiting congestion and high customer traffic within the store.

Many open-air shopping centers, especially those which are entertainment or lifestyle centers, contain park-like grounds and are open and inviting.  Landlords have noticed that, as restrictions loosen and people who were holed-up due to the pandemic begin to venture from their homes, they have been finding enjoyment in spending time at community-oriented shopping centers to relax.  This also often results in the added benefit of associated shopping.

The Contrast with Enclosed Projects

In jurisdictions with more restrictive COVID regulations, most enclosed malls are still prohibited or significantly restricted from permitting in-store shopping.  This is mostly due to governmental efforts to limit crowding within interior locations and the inability to control excessive occupancy and gathering in enclosed shopping centers.

Landlords and retailers of enclosed projects attempt to mitigate these restrictions by providing curbside and other forms of pick-up services, where customers can order products over the internet or phone and have them delivered to cars in the project parking lot or at home.  Although such options provide retailers with some element of economic relief, they unfortunately are not the same (or as good) as providing in-store shopping.

Enclosed mall landlords are also attempting to provide work-arounds in order to enable restaurant tenants the ability to provide more than just take-out and delivery service.  Some landlords have designated portions of mall exterior parking areas and structured parking garages for exterior seating areas for their restaurant tenants.  Although this enables restaurant tenants to generate more business by offering on-site meal service, the general consensus has been that it is much less attractive and less desirable than the outdoor seating areas offered in open-air shopping centers (which areas are usually located in well-manicured common areas, as compared to sterile parking areas and garages).

More Options for Tenants of Open-Air Centers and Issues involved in Converting an Enclosed Mall to an Open-Air Center

It seems clear that when faced with closure regulations and operating restrictions similar to those currently imposed with COVID, landlords and tenants have a greater ability to more fully operate their businesses and mitigate their downsides in open-air projects.

In warmer and more temperate climates, we have seen a trend favoring the development of open-air centers instead of enclosed projects and in the re-purposing of existing enclosed malls into major outdoor centers.  In addition, obsolete and/or dark department stores and other larger spaces are being converted to fulfillment centers, multi-family uses and other creative and compatible uses.  However, redevelopment projects such as these may not be an immediate solution for landlords with non-performing enclosed mall projects.  After all, redevelopment projects of this nature may be major, long term projects, likely to be completed well after the pandemic is over. 

Such projects typically require major entitlement work, multiple lease termination negotiations, negotiations to amend REAs with major tenants, negotiations with tenants that may have rights over site plan changes and design, City easement agreements and a myriad of other issues.  (Furthermore, when negotiating new leases, landlords should consider the possibility of major shopping center changes such as these in the future and consider provisions that would enable the landlord to accomplish major redevelopment changes without having to obtain significant tenant approvals.)  However, after all of the hard work is completed, the landlord will have a state of the art project that will likely better perform in all regards and circumstances and will provide a better ability to manage the major risks being faced today.

3121 Michelson Drive, Suite 200
Irvine, CA 92612

949.260.4600    949.260.4699

50 California Street, Suite 3200
San Francisco, CA 94111

415.262.5100    415.262.5199