Bay Area’s malls-to-housing dreams held up by pandemic

The uncertainties facing the industry are playing out most vividly at the Alameda South Shore Center, a mall that sits next to the Robert W. Crown Memorial State Beach, a hot spot for joggers and windsurfers.

When San Francisco real estate investment firm Merlone Geier Partners bought the property last February, it was working off the same recipe being used to revive dying malls all over the country: add a large helping of housing, mix in some trendy restaurants, and finish with a dash of entertainment to liven the place up. Executives met with Alameda planners to outline the ambitious vision, first drafted by the mall’s previous owners, which would have added 1,200 housing units to the East Bay island community, the biggest influx of residential development in the town’s history.

Then the pandemic hit and the solution to revitalize malls, like everything else, changed overnight. Instead of proceeding with a proposal to reinvent the property as a regional mixed-use waterfront destination, the future retail center looks very much like the present one.

Before the pandemic, more than a half-dozen malls across the Bay Area were eagerly pursuing redevelopment, with big plans to put housing, offices, restaurants and experiential retail in their shopping centers. But the pandemic has scrambled those ambitions. While some are still moving forward, others are halting or rethinking projects. Questions around how permanently consumer habits have changed in the pandemic are combining with a sputtering economy, dried-up capital and uncertain approvals.

Brookfield Properties is planning to move forward with redeveloping two of its three Bay Area malls — Stonestown Galleria in San Francisco, which is already undergoing a $149 million renovation, and Newark’s NewPark mall, an approved $1 billion project expected to break ground later this year.

“Major transformations rely on support and partnership with the local government and community,” Adam Tritt, executive vice president of development at Brookfield Properties, said through email. “There is significant opportunity to transform these assets into mixed-use town centers that will become the foundation for great places to work, live and spend time.”

There’s been talk of redeveloping 30 of 40 acres of Stonestown into housing, office, retail, restaurants and entertainment offerings, but specific plans have not been drawn up by the developers and nothing has been approved by the city. Across the Bay in Newark, the city approved plans for redevelopment in 2018. The project includes building more than 1,500 units of housing and redoing big-box stores such as the former Sears location into smaller units.

But the pandemic has worsened the woes of the retail sector, leading to store closures, some permanent. Shoppers are pulling back on spending amid rising unemployment. In the midst of mounting unpaid rent and retailer bankruptcies, existing plans to revive aging malls at several Bay Area locations are being revised as developers and city officials grapple with shifting needs.

“The trend was already towards mixed-use and some malls fared better than others because they adapted quickly,” said Sucharita Kodali, retail analyst at Forrester Research, a market research firm. “But today, any business that’s about congregating people will be a challenge.”

That’s why South Shore in Alameda, for now, won’t see any changes. “We haven’t filed any paperwork and we don’t have any official plans for the site just yet,” said Stephen Logan, vice president of development at Merlone Geier. The developers are keeping the center’s housing-friendly zoning for the possibility of building homes one day, Logan said.

Redevelopment plans at Richmond’s Hilltop mall have come to a standstill as its owners have put it up for sale.

In addition to its retail, dining, entertainment and services components, the plans included a hotel, 3,500-plus residential units, and office use. The pandemic put a stop to that. A planned 99 Ranch Asian supermarket never materialized. The mall’s Newport Beach Owners, LBG, even marketed the property as a biotech hub at one point last summer.

Other uses for malls have come up during the pandemic. Built to be close to population centers and highways, mall sites are in theory well-situated to become e-commerce hubs. Amazon is reportedly in talks to turn mall locations across the country into logistics centers, according to media reports.

In the Bay Area, the Seattle retail giant is leasing a portion of the Hilltop mall’s parking lot for delivery operations, which is located close to its warehouse and distribution center, the company confirmed. But rezoning entire malls for warehousing and distribution will be difficult and time-consuming.

Kodali, the retail analyst, said some of the tenants she’s seeing in malls are well beyond the retail and office sectors. “I’ve seen everything from call centers, churches and charter schools pop up. It’s really about casting a wide net for mall owners,” she said.

Supervisor Myrna Melgar, who represents the West of Twin Peaks neighborhood in San Francisco that is home to Stonestown, remembers when the mall was “shiny, luxurious, and cool,” with cutting-edge retailers and plentiful natural light. “Now we have no Nordstrom, no Macy’s, no J. Magnin,” she said. “There is a hulking empty garage and vast parking lots.”

She said she is supportive of adding dense housing there so long as it retains its role as a town center with movies, entertainment and dining. She said neighbors have even floated the idea of a skating rink.

“People in the district tend to be scared of density and development — I am for it,” she said. “I think we in fact need it. But the devil is in the details. We are developing that land for the next hundred years so we have to make it work.”

She said she supports Brookfield’s concept of building a town center that will draw shoppers from San Fracisco State, Parkmerced and the nearby high schools. But without new housing increasing the number of customers for stores and restaurants, the retail element could struggle.

“There is a still an important need for retail but in the age of Amazon and Uber Eats, you need more people, more density, to make these concepts work,” Melgar said.

Prior to the pandemic, mall owners were switching to experience-based retail, said Matt Holmes, a partner with Retail West. That sector has been pummeled by shelter-in-place rules.

“It was all about the interactive, experiential retailers — the fitness, movies, bowling. COVID has wiped that out,” he said. “It wiped out 24 Hour Fitness, the bowling chains. It’s just a bummer. Those guys are holding their breath, burning through cash and there is no end in sight.” San Ramon’s 24 Hour Fitness exited bankruptcy in December, having filed for reorganization in June.

Meanwhile, apartment rents have dropped 20% to 30% in many parts of the Bay Area urban core, making residential development more challenging.

“Everybody wanted to do housing and now it’s not making sense,” Holmes said. “You need to hit the ground running with $4 or $5 a square foot rents to make it work, and even in the urban core Bay Area you are not getting that anymore.”

Unless mall owners are able to rezone their properties for biotech or industrial warehouse distribution centers, he sees little hope of redevelopment.

Mall owners struggle to pay their mortgages. “The amount of retail tenants in default right now is staggering. Everybody is just hoping for a better day,” he added.

Shwanika Narayan and J.K. Dineen are San Francisco Chronicle staff writers. Email: shwanika.narayan@sfchronicle.com, jdineen@sfchronicle.com Twitter: @shwanika, @sfjkdineen