Shopping Malls — An Elephant Graveyard?

The news has it that shopping malls, which over the years have become centers of social life are going under in large numbers. There is even a website called if you’re into mall postmortems, compleat with pictures of huge, vacant malls just sitting there. This is of interest to us because for many years construction of malls has been commonly advanced as the “public use” of land takings for redevelopment, some of which resulted in business problems. If you want to read an informative book on the subject of urban mall construction in modern America, check out Bernard Frieden and Lynn Sagalyn, Downtown, Inc. – How America Rebuilds Cities.

So, what happened? Oh sure, the current recession has played a role in this decline and fall of malls, but that is not the whole story because that decline started before the crash. This phenomenon apparently has to do with the slow but sure decline in the fortunes of department stores, and changing styles of mall design – from the enclosed, air-conditioned mall, to the open style with an inner plaza and storefronts lining the streets rather than facing inward and displaying their backsides to the street. Also, the rise of “big box” stores has had an inevitable impact on traditional malls. People these days tend to watch out for signs for restaurants and visit small cafes than crowding the already crowded malls. Owing to this, there has been a significant change in the marketing perspectives for individual cafes and restaurants.

What is of interest to this blog is that many malls have been constructed over the years as redevelopment projects. Here, on our turf in Southern California, we can think of several large malls like that. We can also think of some that have run into trouble (see, e.g. Community Redevelopment Agency v. Force Electronics (1997) 64 Cal. Rptr. 2d 209 — redevelopment agency unable to pay a condemnation judgment). What intrigues us is that news of these economic reverses are usually buried in back of the Business section of the local news paper, but even there we don’t see coverage of what happens to the redevelopment bonds that were issued to acquire land (usually by eminent domain) and construct those malls. This is no small matter, being as bonded indebtedness for redevelopment in California has gone up from $5 billion in 1985 to over 60 billion by 2004, and counting.

The problem was foreseen years ago in the opinion of Justice Macklin Fleming of the California Court of Appeal, in Regus v. City of Baldwin Park, 139 Cal.Rptr. 196 (Cal.App. 1977), where he presciently warned:

“[U]nrestricted use of redevelopment powers fosters speculative competition between municipalities in their attempts to attract private enterprise, speculation which they can finance in part with other people’s money. When the extraordinary powers of legislation designed to combat blight and renew decayed urban areas are used as a fiscal device to promote industrial, commercial, and business development in a project area that is merely underdeveloped rather than blighted, competitive speculation may be turned loose. By misemploying the extraordinary powers of urban renewal a redevelopment agency captures pending tax revenues which it can then use as a grubstake to subsidize commercial development within the project area in the hope of striking it rich. Such schemes contemplate borrowing money by issuing bonds on the strength of assured future tax revenues, money which is then used to acquire, improve, and resell property within the project area at a loss as an inducement to business enterprises . . . to locate within the project area rather than in neighboring communities. In essence, tax revenues are used as subsidies to attract new business. The immediate gainers are the subsidized businesses. The immediate losers are the taxpayers and government entities outside the project area, who are required to pay the normal running expenses of government operation without the assistance of new tax revenues from the project area.”

“The promoters of such projects promise that in time everyone will benefit, taxpayers, government entities, other property owners, bondholders; all will profit from increased development of property and increased future assessments on the tax rolls, for with the baking of a bigger pie bigger shares will come to all. But the landscape is littered with speculative real estate developments whose profits turned into pie in the sky; particularly where a number of communities have competed with one another to attract the same regional businesses.”

Justice Fleming warned particularly against the use of public indebtedness to facilitate the construction of business enterprises that, as he put it, “are primarily those of consumption [like shopping centers] rather than production whose acquisition does not increase the total wealth of a region as a whole but merely redistributes the existing supply by capturing business from rival communities. The success of such strategy,” said Justice Fleming, “assumes the absence of effective counter-measures by rival communities targeted for displacement.”

So it looks like those chickens are now coming home to roost, demonstrating that Justice Fleming was right when he concluded his Regus opinion by admonishing that private enterprises may embark on such speculative competitive enterprises, but public entities that would spend public funds, may not.