To get a sense of how developers are transforming the American shopping mall, just take a look at the project gearing up for construction in the San Francisco Bay Area hometown of tech giant Apple.
Developer Sand Hill Property Co., based in Palo Alto, won final approvals for a long-planned revamping of a vacant shopping mall in Cupertino that will add nearly 3,000 homes, 2 million square feet of offices and 230,000 square feet of retail property to the city that's known for the iPhone maker's headquarters and well-paid workforce.
It will be the biggest commercial development in Cupertino since Apple completed its iconic flying saucer-shaped headquarters building seven years ago. The idea that a high-profile global headquarters building would be followed by a shopping mall in terms of the biggest project in town illustrates the shift in property use in the past half dozen years, marked by the cultural and economic changes accelerated by the COVID-19 pandemic.
The Vallco Shopping Mall, a 1.2 million-square-foot center that’s struggled with occupancy and foot traffic over the past decade, is just the latest retail real estate around the country to be targeted for new uses as housing demand rises and shopping patterns change.
The most popular U.S. mall redevelopment uses are now residential and office, with nearly 54% of mall redevelopments incorporating residential use and nearly 35% incorporating office use, according to a study by JLL research analyst Saul Lua.
“Malls rely on their anchors to attract consumers,” said Lua. “Once vacant, it is difficult for mall owners to fill an anchor space due to the large square footage requirements. One solution mall owners have found for vacant anchor space is anchor redevelopment.”
Retail to Residential
In Cupertino, plans call for 2,669 residential units, representing more than half the housing units the city needs to build by 2031 to meet state mandates to address shortages across California. It fits among the targeting by developers of malls across the nation for mixed-use redevelopments in which used retail space that’s struggled to compete with surging online shopping is replaced by homes, offices and other property uses.
Simon Property Group, the nation’s largest mall landlord, plans to spend $800 million this year on a half-dozen redevelopment projects from coast to coast. In Virginia, Santa Monica-based Macerich proposed redeveloping a former Lord & Taylor store at the Tyson’s Corner Center into a tower featuring offices and homes.
And in California, Dallas-based Centennial aims to redevelop the 1 million-square-foot Valencia Town Center in Santa Clarita after buying the property for $199 million last September; and New York-based Brookfield Properties recently refinanced the Stonestown Galleria in San Francisco with plans to add 3,500 residential units to the site.
Even so, not every shopping center is in need of a face lift. The Westfield Century City mall in Los Angeles, for example, has been cited as the "crown jewel" in the portfolio of French mall giant Unibail-Rodamco-Westfield, reporting net cash flow of $100.4 million in 2022. The mall's tenants reported roughly $1 billion in sales at year-end 2022, the company said several months ago, higher than 2019's $964 million in sales.
Though URW has sold off some regional U.S. malls over the past three years, the company intends to maintain a stake in the country with a focus on its 12 flagship malls, including Century City, according to a 2023 Fitch Ratings report.
Against that backdrop, the new, 6.5 million-square-foot Cupertino project called The Rise is coming together about a mile from Apple Park, the technology giant's headquarters.
Apple accounts for about 80% of Cupertino's 7.7 million square feet of offices. Now the office portion of the mall redevelopment will increase the city's office space by 26%, part of what makes it the largest project of its type on the books since Apple completed its headquarters in 2017.
Full Offices
There are no offices under development in Cupertino, where the vacancy rate for the product type is 2.5%, far below the national average of 13.7%.
In addition to accounting for a bulk of the planned housing required for the city, the proposed residences for The Rise also represent nearly half of the existing 5,500 units in Cupertino, according to a CoStar analysis.
The apartment vacancy rate stands at 3.9% in the area, and no units have come on the market since 2016.
The Rise also serves as a notable construction start for the Bay Area, a region that has seen several mixed-use projects stall or scale back in light of continued market distress.
Google’s Downtown West project in San Jose has hit pause as office vacancy and availability rates hit record levels in San Jose. Related Cos. has also cut the office portion of its Related Santa Clara project by 1 million square feet.
“The market forces that have continued to impact projects across the Bay Area over the past 18 months have pushed us all to new levels of creativity and adaptability and surfaced an even deeper commitment to working together to ensure this project is successful,” said Reed Moulds, a Sand Hill managing director working on The Rise, in a prepared statement.
Cupertino Deputy City Manager Tina Kapoor told SFGate The Rise is an “investment in Cupertino’s future" that will address housing needs and promote "the long-term strategy to create a more resilient and inclusive community.”
The asking rent for a two-bedroom apartment in the city is $3,658, roughly 11% higher than the greater San Jose market, where rents are nearly twice the national average and trail only New York City and San Francisco, according to CoStar data. Higher home prices in Cupertino are largely driven by limited demand and a more affluent population of technology workers, in part due to Apple's presence.
Cupertino’s median household income was nearly $224,000 in 2022, according to data from the United States Census Bureau, compared to $91,905 for California and $75,149 for the United States.