Big retail versus big real estate and a choice between decay or renaissance

One more time, the Austin American-Statesman reported yet another casualty of the post peak oil crisis without recognizing it as such. Nor did the Statesman or the parties involved recognize the opportunities for urban renaissance inherent in the local manifestation of the global economic crisis.

Suburban shopping mall developers finally receive their comeuppance. Simon Property Group, Inc., a principal owner-operator of Highland Mall in Austin, Texas, finds itself the subject of a lawsuit brought by a major tenant (Dillard’s Department Store) distressed by the decay ensuing around it. Simon trades on the S&P 500 as “the largest public U.S. real estate company,” (according to its web site http://www.simon.com/About_Simon/ ). Simon presides over interests in 386 properties comprising 263 million square feet of gross leasable area (GLA) in North America, Europe, and Asia from its headquarters in Indianapolis.

Simon owns 33 properties in Texas and six in Austin. The 13 properties within 100 miles of Austin include: Arboretum at Great Hills, Barton Creek Square, Gateway Shopping Center, Highland Mall, The Domain, The Shops at Arbor Walk, Lakeline Plaza, Lakeline Mall, Round Rock Premium Outlets, Wolf Ranch Town Center, Rolling Oaks Mall, Ingram Plaza, and Ingram Park Mall.

Simon describes itself as “a fully integrated real estate company.” What Simon says might make sense to a shopping center developer with an MBA, referring to “vertically integrated management structure.” However, it rings hollow to an urban planner who looks at land use and community zoning. Simon properties rarely ever contain any other land use besides retail. Practically no customer can walk there from their home or office. Good luck arriving by bus.

In the U.S., Simon’s 246 million square feet (GLA) earned tenants an estimated $62 billion in total retail sales in 2008. Regional malls (like Austin’s enclosed Highland Mall) together represent 64.5% of Simon’s U.S. portfolio, as of 12/31/08. Although Simon claimed a lease occupancy rate of 92.4% for its U.S. properties, a lawsuit brought by Dillard’s department store complains that Highland Mall suffers from a roughly 50% vacancy rate. Simon owns only 50% of Highland, which officially enjoys an occupancy rate of 60.5%, according to its own reporting. Simon owns 100% of Barton Creek Square (97.7% occupied) and 100% of Round Rock Premium Outlets (100% occupied). Dillard’s alleges, in court documents (Dillard Texas, LLC and The Higbee Company v. Highland Mall limited partnership, U.S. District Court, Austin, 3/27/09) that the mall partnership’s neglect of the property brought about deterioration and loss of tenants in the property. Clearly, neither party acknowledges the global situations affecting them both.

Court documents outline a saga of successive ownerships, changes of store names, and economic transitions. The mall, built in the late 1960’s, opened in the early 1970’s; at the height of U.S. oil production and price hegemony – the “oil peak.” Cheap gasoline at that time enabled nation-wide aggressive suburban sprawl. Hardly anyone cared how much gasoline they consumed driving all over the urban area. Big department stores like Scarbrough (one of Dillard’s predecessors) moved out of downtown Austin to cater to suburban subdivision dwellers.

The concrete and paint had hardly dried on Highland Mall when petroleum production in the United States began to decline and imports began to increase. Gasoline prices rose accordingly. The Arab Oil Embargo occurred in 1973-74 and Americans suddenly became aware of our vulnerability to energy shocks resulting from foreign manipulation of the market. We had long since become inured to domestic market manipulation.

Since 1974, a major recession, an oil glut, plummeting investment in energy development, resurgent energy demand, an historic price spike, another major economic recession, and epidemic denial have left the U.S. no better prepared to cope with an energy transition than we found ourselves in 1974. The economic system that created isolated single-use urban zones called “shopping malls” assumes and requires cheap motor fuels and widespread automobile ownership, to say nothing of a transportation system that focuses on moving cars rather than facilitating mobility choices for people.

Highland and other malls could salvage their future and that of their surrounding communities if they transform themselves through transit-oriented development (TOD). Highland could even capitalize on its proximity to the new CAPMETRO commuter rail line just across Airport Boulevard.

The owners and managers of Austin’s Highland Mall do not need to reinvent reinvention. Chattanooga, Tennessee already provides an excellent example of how to do it. Congress for the New Urbanism featured the redevelopment of Chattanooga’s Eastgate Mall. Redevelopment began in 1997 with a nearly empty shopping center. A visionary group reintegrated the retail-only zone into the urban street grid. The shopping center no longer faces inward to private space but outward to public space. By 2001, occupancy rate returned to 90%.

We must all recognize that we cannot return to business as it existed prior to 1970. Prosperity will not return if we expect to power our economy on cheap fossil fuels. We must adapt our existing urban areas to cope with the new energy and economic realities. The Galleria in Houston offers a near example of the direction we might want to go. It provides almost all the pieces for mixed-use development except for the rail transportation link and mixed-income housing options. The Galleria contains shopping, office space, hotels, residential properties, and a variety of services catering to local and international clientele. The Galleria might yet succumb to its own success. The traffic around the Galleria remains virtually gridlocked for hours practically every day. Adding light rail lines to connect the Galleria to other urban villages and activity centers around the metropolitan area would help mitigate traffic problems and ensure mobility for merchants and customers.

Although Austin and Houston lack the population density of European cities that use efficient electric mass transit, both cities would redevelop themselves and cluster population and activity around transit nodes as they came on line. This has already begun in Dallas with the DART Rail system. Examples abound of ways to cope with the unfolding crisis. We need only adjust the way we view the world around us.

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