Small cities grapple with empty malls

Joey Neely grew up going to the mall in Albert Lea, when it held lots of stores, a full food court and crammed craft shows.

"That's what you did in high school — you went to the mall and hung out," said Neely, 31. But today, the Northbridge Mall "is nothing like what I remember." Just weeks after buying a kitchen supply store there in 2013, he knew: The shop would do better downtown.

When he moved the Copper Kitchen to South Broadway, Neely's rent fell and his sales rose. The Northbridge Mall had lost another tenant.

Despite an improving economy, some small-town malls across Minnesota remain ghosts of their former selves. Malls in small cities have emptied as anchor tenants such as Sears and J.C. Penney have closed, smaller shops have shuttered or moved and big retail has shifted to Walmart-anchored shopping centers.

"Tenants today really don't want to be in enclosed malls in smaller towns," said developer Brian Pellowski, owner of PBK Investments. "It just doesn't work."

Meanwhile, upscale suburban malls are back. Nationally, regional malls' annual sales per square foot have risen from a recession-fueled dip to an all-time high, according to figures from the International Council of Shopping Centers, a trade group. But some smaller malls in outstate Minnesota haven't recovered.

That's led cities and developers to rethink and redo the retail centers. Pellowski plans to "de-mall" the Market Street Mall in Marshall, which has long housed unconventional tenants, including a medical center. Hibbing is banking on a new, nearby hotel bringing in tenants to a mall that's half full. In Austin, the city and port authority announced a deal to buy the struggling Oak Park Mall and tear down half of it so a huge Hy-Vee grocery store can move in.

Some experts have predicted that in the next few decades, a large slice of the nation's malls will fail. A website called Dead Malls is devoted to descriptions of vacant food courts and photos of dilapidated marquees.

But new numbers from Green Street Advisors and others show that — especially for big malls in affluent markets, rated with an "A" — occupancies and rents are growing.

"By and large the vast majority of the stock is incredibly healthy," said Jesse Tron, spokesman for the shopping centers' trade group. "The bottom 5 percent in any business, you're going to find some weakness."

Some of the malls on the brink in Minnesota are smaller than the trade group's definition of a regional mall, which spans enclosed structures of 400,000 to 800,000 feet.

The Market Street Mall in Marshall is 150,000 square feet. When Pellowski bought it in 1995, it was half empty. He thought broader than shopping, bringing in a clinic and a school. When the clinic decided to buy out the rest of its lease and to build its own facility, Pellowski decided it was time to "de-mall," he said.

"Shoppers like to drive up to the front door," Pellowski said. "People don't have time today to go to a mall and spend a half day walking around. That's passed."

Assuming tax increment financing is approved, he plans to begin construction in spring 2015.

Pellowski has similar plans for the Northland Mall in Worthington. The city had long been fighting that mall's former owner, charging him with not maintaining the building. Because of its poor condition, "that one is a complete scrap," Pellowski said.

His vision: a strip center, apartments and housing.

The Irongate Plaza in Hibbing has hung onto its Sears and J.C. Penney. But the 89,000 square feet once occupied by Kmart remains vacant. The surviving anchors "stand in contrast to the darkened alley of shuttered storefronts, most scarred with the remnants of signs for stores that closed" years ago, wrote Iron Range resident and blogger Aaron Brown in the Daily Yonder, a rural news website.

While it was a dominant retail center when it opened in 1979, the analysis continues, Irongate got "caught in the crossfire" of national decisions such as bankruptcies, said Duane Northagen, former executive director of the Hibbing Economic Development Authority.

The city spent years trying to build up the district around the mall, said Northagen, who held the job 15 years and now runs the Wright County Economic Development Partnership. The mall's management repainted the facade, redid the marquee and offered new tenants free rent.

"We spent an awful lot of time trying to figure out answers," he said.

But nothing worked.

The mall's website advertises at least 124,000 square feet of vacant space in a mall that totals 250,000. The mall's marketing manager hung up on a reporter seeking comment this week and did not respond to an e-mail or later calls.

Because the landlords of the Oak Park Mall in Austin had been behind on property taxes, the land had several times come close to being forfeited to Mower County.

The mall parking lot, too, is notorious, said Dankert, the director of administrative services. "We've heard horror stories of people's cars breaking in some of the ruts." Given those concerns and knowing that the Hy-Vee in town was looking to expand, the city approached the grocery store about taking over the middle of the mall, he said. The Hormel Foundation gave the city and port authority $3.2 million to buy the property. The city is negotiating with tenants to change lease agreements before moving forward.

Under a new plan for the mall property, the Shopko, which owns its own building, would stay. So would the fitness center, the movie theater and, on the other end, the Younkers department store. But everything in between would come down, leaving some businesses without a home.

"We don't want to drive anybody out of business," Dankert said. "But I think the overall response of the community has been 99 percent positive. The mall has been a spot of discussion for many, many years."