Hilltop Mall, Revisited: New owners bet on different strategy to yield big success

As malls across the country shutter their doors, developers in Richmond are doubling down on the Hilltop Mall. The latest owner is banking on a brand-new name, boutique shops, restaurants and movie theaters to transform Hilltop’s image and deliver a healthy return on investment.

“We want it to be more of a lifestyle, entertainment center than a traditional mall,” said Leslie Lundin, a managing partner at LBG Real Estate Companies, which bought the Hilltop property earlier this year for $23.75 million. “We want people to understand it’s going to be a different place. It’s going to be a new place.”

Backed with capital from London-based Aviva Investors, LBG is planning a major renovation and renewal at the site that plans to include apartment units, entertainment venues, and potentially even an outdoor area with space for community events.

In the immediate future, LBG is most concerned with getting tenants into the space and reinventing Hilltop’s image in the community. “Our goal right now is to not be charging market rents. Our goal is to just fill the spaces,” Lundin said.

To that end, LBG says it will offer discounted rates to encourage local home- and e-businesses to create popups at Hilltop during the holiday rush. Lundin hopes that customers will be excited..

“That’s what’s important to us,” she emphasized. “Just bring the community back and have them see what it could be and what it will be.”

Hilltop is a microcosm for larger trends closing malls across the country. Since their heyday in the mid-20th century, malls have steadily suffered at the hands of e-commerce giants like Amazon.

Real estate research firm Cushman and Wakefield found that mall visits across the United States declined by 50 percent between 2010 and 2013, and multinational finance firm Credit Suisse predicts that 25 percent of all malls will close by 2022.

With more Americans shopping online, many formerly dependable department stores are losing revenue and closing locations. These bigger stores, known as anchor tenants, historically attracted customers to malls and shouldered a larger burden of their operating costs. But in an effort to save their struggling businesses, anchors like JC Penney, Macy’s, and Sears have all announced they will close more than 100 locations this year. JC Penney — which had been an anchor at Hilltop since it opened in 1976 — closed its Richmond location this July.

This phenomenon has not hit all malls, though. As consulting firm Green Street Advisors president Jim Sullivan explained to CNBC, “the highest-quality malls will always have a retailer that wants to be in their center.”

Lower end malls, on the other hand, which don’t have the same ability to attract stores, are at risk of closing unless owners are prepared to make substantial changes.

For developers who are able and willing to invest money in adapting, their malls have not only survived, but also thrived. In a 2017 analysis of the real estate sector, Green Street Advisors reported that some malls have more than doubled their value since the recession by “introducing ‘internet resistant’ concepts such as restaurants, entertainment and services.”

A traditional mall makes money by collecting two revenue streams from tenants: base rent and percentage rent. The former is a fixed monthly rent that is calculated depending on the size and location of the space. The latter is a rent calculated as a percentage of the store’s monthly sales. These rents help owners cover the operating costs of the property, as well as upkeep and necessary renovations.

When stores can’t sell as much merchandise, however, their percentage rents decrease, and the whole mall suffers. This decline forces owners to invest money to maintain the space and make changes that will attract customers.

According to Lundin, Hilltop’s previous owner, Simon Property Group, was not interested in making that investment. “They were just looking at it as this crime-ridden area, they weren’t going to invest any money in it,” she said.

Lundin observed that the property wouldn’t have gone into such disrepair if Simon had been willing to maintain the space. “There’s definitely retail demand,” she said. “There’s definitely a lot people going there, there’s definitely a lot of money in the market. And since we’ve closed, we’ve had a lot of tenant demands for the space.”

A representative from Simon Property Group responded only by stating the company “doesn’t comment on financing issues.”

LBG is excited by the property’s location near Interstate 80, and by what it says is a regional community in need of another entertainment and shopping location. “It’s kind of like all the stars are aligning right now for this property,” Lundin remarked. “There’s a need, people have money, and employment is very high. Everything is moving in the right direction to be able to successfully reposition this property in the next couple of years.”

Like many developers, LBG is focusing on transitioning Hilltop from a shopping location to an entertainment destination. They are hoping to bring in movie theaters, a variety of new restaurants, and maybe even a live theater. They are planning community events like Halloween trick-or-treating for kids and families, and will feature many small boutiques, which they say will offer shoppers items they can’t buy at Amazon or Target.

LBG is also negotiating with a grocery store and is considering nontraditional tenants that can provide health care services. “The idea is to make the mall into a community center,” Lundin said, “where the local community finds services there during the day and then they come back at night and have their entertainment.”

While healthcare clinics and community events won’t yield the percentage rents traditionally collected by owners, LGB is betting that just getting people to come to the mall will position stores to be successful: the more time people spend at the mall — at events, eating, going to the movies, or running a few errands — the more they will buy.

LBG isn’t the only developer in the Bay Area testing out this strategy. At NewPark Mall in Newark, owner Rouse Properties brought in AMC movie theaters, a farmers market, and a dental clinic. They’ve also created monthly events like outdoor “Yoga on the Row.”

While the long-term success and staying power of these new development strategies is unknown, the approach is working at NewPark. Josh Goldman, a senior vice president at Rouse, says that since the initial redevelopment was completed in 2016, sales at NewPark have “picked up greatly.” Since 2012, sales per square foot at the mall have increased 17 percent and are projected to rise another 43 percent by 2022.

Goldman says that, despite Amazon, “customers still very much want a brick and mortar experience.” He pointed to online stores like Warby Parker and Bonobos that are now starting to invest in physical storefronts.

“You have to literally and figuratively think outside the box,” he continued. “The shopper today doesn’t just want a place to shop. They want a true live, work, play experience.”