'Mall Repair' in Laurel
Foundering Shopping Center To Get an Extreme Makeover

By Ylan Q. Mui
Washington Post Staff Writer
Monday, March 5, 2007; D01

The halls of Laurel Mall are lined with vacant storefronts. Some are empty shells; others are masked by new drywall and paint. Even the food court was deserted on a recent afternoon. And the enormous parking garage that sits on Route 1 and is supposed to serve as the mall's grand entrance is almost never full, a testament to decades of neglect and the fickleness of retailers.

Thomas P. Falatko looked at the property and asked the tough question: Should Laurel Mall even exist?

Across the country, many regional malls are languishing as shoppers are drawn by the gravitational force of super-regional mega-malls outfitted with restaurants, spas, movie theaters, gyms, supermarkets and, oh yes, stores. Or else they're ambling down the brick-lined streets of an outdoor "lifestyle center" that mimics the feel of a town square, with condominiums and office buildings nearby. The regional mall -- enclosed shopping centers between 400,000 to 800,000 square feet that proliferated through the 1970s and 1980s -- is becoming a relic of the past.

But Falatko, senior vice president of private-equity firm Somera Capital Management, has made a business out of turning around shopping centers like Laurel Mall. He calls his firm "a mall repair shop." With partner AEW Capital Management, the company is betting tens of millions of dollars that it can bring back Laurel Mall.

There are elaborate plans for a new brick facade, a first-run movie theater, higher-end national retail tenants, a new parking garage, a pretty water fountain. Think of it as Extreme Makeover: Mall Edition. It's the biggest investment in one shopping center that Somera has ever made.

"It's buying the worst house on the best block," Falatko said. "This is what you dream about."

Grand Beginning

Laurel Mall started off as two shopping centers. Laurel Shopping Center housed Giant Food and former local retail icons Hecht's and Peoples Drug. A Montgomery Ward department store was about a block away. In 1977, New York developer Shopco came up with a $30 million plan to connect the two buildings with an indoor mall and a new anchor tenant, J.C. Penney. The plans called for nearly 1 million square feet of retail space, making it bigger than the nearby White Flint, Columbia and Landover malls.

The current Laurel mayor, Craig A. Moe, was at the grand opening in 1979 as a spectator and later did a brief stint as a security guard. He recalled the awe over the eight boutique stores in the middle of the mall that sat on a carousel that rotated once every 40 minutes.

Malls, which emerged in the 1950s with two stories of shopping anchored by department stores, were in their heyday when Laurel opened. Most of the 20 shopping centers in the Washington area built in the 1970s and '80s with more than 400,000 square feet of leasable space were enclosed malls, including White Flint and Springfield Mall. Mazza Gallerie in the District was built in 1975 but is just under 300,000 square feet. Tysons Corner Center is the region's largest mall, with more than 2 million square feet, and was built in 1968.

But tastes changed. Enclosed malls gave way to open-air shopping centers that mix retailers, restaurants, residences and offices in one place. Only three shopping centers built in the Washington region since 1990 are enclosed.

Over the years, retailers left Laurel for Columbia Mall or White Flint. In 2001 Montgomery Ward went out of business and closed its Laurel store. A year later, JCPenney shut down. Then Sam Goody went dark, followed by Express and Structure and electronics retailer Babbage's in 2004. Even McDonald's closed.

As more stores left, fewer people shopped. And as traffic declined, stores kept closing. Laurel Mall's financial problems put it in court-appointed receivership two years ago.

Now the anchors are Macy's, Burlington Coat Factory and International Furniture Liquidators. The mall is only about 84 percent leased. Somera Capital and AEW bought it last year for $31 million.

Changing Tastes

Similar stories are playing out across the country. Malls need to change every seven years to remain relevant, said Stan Laegreid, principal and lead shopping center designer at Callison, the architecture firm Somera hired to redesign Laurel Mall. Those that don't can quickly fall by the wayside, posing a new challenge to developers: what to do when they fail.

Particularly vulnerable are regional malls, which generally have two or more anchors and draw shoppers from a radius of five to 15 miles. They have struggled with the popularity of new formats such as super-regional centers, with more than 800,000 square feet and at least three anchors; smaller, outdoor centers that include upscale national chains and restaurants; and power centers lined with big-box category killers such as Home Depot. The problem of the regional mall has become so pervasive that it spawned a new buzzword, "de-malling."

The least invasive option is to refurbish the building and bring in new tenants to draw different customers -- a restaurant or a movie theater. That can give shoppers new reasons to come to the mall, but often it isn't enough to change its reputation, Laegreid said.

Usually, developers have to go deeper. Maybe take off the roof and turn the center inside out, so retailers face the street. Add a few restaurants with outside seating, and a new mall is born.

But in some extreme cases, the best option is simply to tear the thing down and start all over again.

"There may be times in a market where a mall has such a negative connotation that maybe the highest and best use is the real estate under the building," said Jon Eisen of StreetSense, a Bethesda-based consulting and retail brokerage firm. "Sometimes it's better to start from scratch."

Such is the case of Rockville Town Square, at Beall Avenue and Route 355.

In 1972, it was the site of an enclosed mall. The center was never more than 50 percent leased, partly because many retailers already had stores at nearby Montgomery Mall and White Flint. In 1996, the town decided to demolish it.

What is emerging is entirely different. Rockville Town Square, developed by Federal Realty and expected to open over Memorial Day weekend, will be a mixed-use outdoor center that focuses more on restaurants and services than retail. Tenants include Taste of Saigon, Sushi Damo, Lebanese Taverna and Gifford's Ice Cream. It also has a public library and arts center. Most of the retailers are independent stores or regional chains, such as denim and accessories store Cloud 9 Clothing from Baltimore and Bethesda-based Pomegranate & Co., which sells home furnishings.

But Chris Weilminster, senior vice president for leasing at Federal Realty, said the little touches make the biggest difference: wide brick sidewalks, short distances between buildings that make the center walkable, storefront retailers and lots of trees. As of last week, there was only one vacancy left, he said.

It's the same concept the firm successfully used to develop the Village at Shirlington and Bethesda Row. One early sign that it is working in Rockville: Starbucks is open. Venti latte, anyone?

Rebuilding

Falatko believes in malls. That's his job.

Somera has bought eight shopping centers across the country since 2002. The company generally looks for centers that have at least 500,000 square feet and sales per square foot starting at $300. It prefers metropolitan areas with at least 200,000 people.

Somera does the dirty work, transforming the properties and holding on to them for two to eight years before selling. It flipped West Oaks Mall in Houston in 2005 after two years, a $10 million renovation and sales increases of 6 percent.

Laurel, however, is a particularly big problem. It's small for a shopping center -- just about 663,289 square feet -- but Somera expects to spend more to renovate the mall than it did to buy it. In addition, it has no control over the site of the Burlington Coat Factory, which is still owned by the Berman family, which owned the original Laurel Shopping Center.

But the tenants are the least of Laurel's issues, said Stephen Kriegel of General Growth Properties, which Somera hired to manage the mall. More challenging is changing the reputation of the mall among retailers and Laurel residents.

"We knew the perception of the property was bad. We knew we were getting a problem property," Falatko said. But community reaction was "pretty negative."

It starts with the parking garage, a hulking, run-down structure that blocks the view of the mall. The new plan calls for the garage to be torn down and rebuilt along Fourth Street, hidden by trees. A smaller deck will sit just off Route 1.

That will free up space at the mall's most visible entrance along Route 1 for free-standing retail and restaurants, with a courtyard and fountain in the center. Mall retailers closest to the street would be turned outward to face the road, with the rest of the stores accessible from inside.

They also hope to "Laurelize" the shopping center by using local stone and brick for the facade. The mall's center court will have a clock tower reminiscent of one at the former B&O railroad station nearby, while the children's play area will have a Laurel race track theme.

But what has generated perhaps the most interest is the promise of a 16-screen movie theater and bookstore to replace International Furniture Liquidators. Somera and city officials said those two requests have topped residents' wish lists in focus groups and public hearings.

"I think they really did their homework," Moe said. "I think you're going to really see a difference instead of a big block mall."

Change is already occurring in Laurel as residents with more disposable income arrive. The median household income within a three-mile radius of the mall in 2006 was $63,671, according to research by General Growth. Officials hope the military base realignments will bring in more families because of the city's proximity to Fort Meade.

Residents want to believe that change is coming to the mall, but they have been disappointed too many times, Moe said. There are dreams of Old Navy, Gymboree, maybe even a Panera Bread or a Cosi. Somera said it probably will not be able to announce the tenants until spring.

Already the competition is lining up. Plans for the Konterra Town Center south of Laurel Mall include luxury condos and retail to match. Laurel Lakes Centre recently was revamped to focus on big-box stores and national chains. There are scores of strip centers up and down Route 1.

But Moe thinks there is still a place for Laurel Mall.

"Has the community outgrown this type of mall? I don't think so," the mayor said.