It Took a Village to Transform a Former Sears Into a Vertical Urban Village
By Richard Lawson
CoStar News
n an unusually warm winter day in Memphis, Tennessee, scores of people mill around a mammoth former Sears store and distribution center converted into an urban vertical village.
Walking past walls covered in art, they stop in the small grocery store or grab a bite at one of several eateries before going home from one of the offices in the building.
Others head to dentist or doctor appointments or an art class. Students from the charter high school there huddle with their friends after the day’s last bell, some of whom will eventually head up to the apartments where their families live.
They bring life to the redeveloped 93-year-old, 1.5-million-square-foot building named Crosstown Concourse a few miles from downtown Memphis, a city along the Mississippi River known for blues music, Elvis Presley and FedEx. Centered on the arts, healthcare and education, the village is part of an ever stronger trend around the country to give old urban buildings a new and different life.
But it wasn't easy. Crosstown Concourse took seven years from concept to completion with a unique development team that included an art history professor, an artist and the grandson of Holiday Inn founder Kemmons Wilson.
They stitched together $210 million from 30 different funding sources to transform the building back into the economic anchor it had been for decades in the neighborhood as well as the city.
The Curb Market is Crosstown Concourse's resident grocery store. (Richard Lawson/CoStar)
In terms of complexity, “this thing was off the charts,” said Jim Howard, CEO of Dudley Ventures, a Phoenix-based firm specializing in federal tax credits and part of Crosstown Concourse’s funding mix.
Crosstown, named for intersecting trolley tracks when they existed in the midtown Memphis neighborhood, suffered in the wake of Sears shutting down the operation in 1993. Real estate around the store emptied out over time to depress the area.
“It was a pretty heavy weight around the ankle of the surrounding community,” said Todd Richardson, the Crosstown Concourse co-founder who had taken a leave of absence from teaching art history at the University of Memphis while putting the deal together. “It had a huge negative impact on property values.”
Today, some 1,500 people work in the building and roughly 3,000 people come and go from the building each day.
There’s little commercial space left to lease and the 265 mixed-income apartments in the top floors are full.
Public art greets patients entering Church Health on the ground floor of Crosstown Concourse. (Richard Lawson/CoStar)
Office tenants include St. Jude Children’s Research Hospital’s fundraising organization, called American Lebanese Syrian Association Charities; Church Health, a healthcare provider to those who don’t have insurance; Methodist Le Bonheur Healthcare; and NexAir, a distributor of gases and welding supplies.
Education tenants include Memphis Teacher Residency, a faith-based, four-year teacher preparation program; a satellite campus for Christian Brothers University; and Crosstown High School, a charter school where learning is done through student-led projects.
There’s a mix of retail tenants such as a grocery store, a FedEx location, an AT&T store, a nail bar and a credit union. Those are sprinkled among numerous food options. For exercise, a YMCA has space in the building.
Richardson lives in the building with his family. His daughter attends the high school. His office is on the second floor.
He said there are times he realizes that three or four days pass without leaving the building and thinks, “I have to leave the building.”
Big Memphis Employer
Sears had been expanding around the country in the 1920s with large catalog distribution centers that included retail stores.
The company sought to create a network that better reached rural areas more quickly. Its Memphis operation served Tennessee and surrounding states.
Essentially, it was Amazon before the internet. Similar to Sears, the Seattle-based retailer has been leasing and building large distribution centers around the country to expand its network to get closer to customers and speed up delivery times to as little as a day. Instead of the famous Sears catalog of 100 years ago, these days folks order from home for home delivery through Amazon's retail website.
Coincidentally, Amazon recently announced a major distribution center about 10 miles northeast of Crosstown Concourse in the Raleigh neighborhood. Amazon's distribution center’s ground level is expected to measure 865,000 square feet, but mezzanines in the building will push total space to about 2.1 million square feet.
When it opens later this year, Amazon said that 1,000 people will be working there.
That’s the same number of employees Sears had on its first day in 1927 when it opened the first portion, a 650,000-square-foot building built in 180 days. Sears built additions over the years to more than double that space.
But Sears started a slow decline when consumers' shopping habits began to change and eventually Sears vacated the building in 1993.
Unlike the utilitarian Amazon design for distribution centers, Sears left a building designed in the art deco style with a large tower serving as a centerpiece.
Old Is New
Sears built similar buildings in such places as Dallas, Houston, Kansas City, Minneapolis, Los Angeles, Boston, Atlanta and Seattle. And many have been redeveloped into new uses.
Coffee retailer Starbucks moved its headquarters into the former Sears in Seattle. Atlanta-based developer Jamestown redeveloped the Atlanta building into Ponce City Market. That former Sears building shared the same original architect as the structure in Memphis. In Houston, work started last year to transform a former art deco Sears at 4201 Main St. into an innovation hub.
But those aren’t the only adaptive reuse projects around the country. Millions more square feet of historic buildings have been repurposed and still more could be redeveloped.
“The market is embracing old space with new fervor,” said Ed McMahon, senior fellow with Washington, D.C.-based Urban Land Institute.
Ponce City Market mixes new construction with the conversion of a former Sears building in Atlanta. (CoStar)
McMahon said creative businesses like space that feels more authentic than new, and the old buildings tend to have large floor plans that allow space to be reconfigured easily. The $600 million redevelopment of Chicago’s long-vacant Old Main Post Office is an example, he said.
Pharmacy chain Walgreens signed a lease for its headquarters to locate in the 2.8 million-square-foot mixed-use refurbishment. San Francisco-based ride-hailing company Uber signed a lease for 450,000 square feet for a major hub in Chicago.
In another example, developers converted a portion of a former Buffalo, New York, mental hospital that opened in 1872 into Hotel Henry Urban Resort Conference Center. McMahon said the property had been the “largest white elephant in New York.” There are buildings on the site to be restored.
Ford Motor Co. is rehabbing the former Michigan Central Station that opened in 1913 in Detroit for a research center.
Gauging how much inventory exists is a challenge, said K.C. Conway, chief economist for CCIM Institute, an organization that offers courses and certification for commercial real estate investment sales brokers.
“A lot of these deals get classified as new” which throws off the numbers, Conway said. He said adaptive reuse represents about 5% to 7% of all real estate development.
Many of the historic properties are in urban centers, where availability of open land is limited and land costs have increased as a result. That’s helped buoy interest among developers in adaptive reuse of not just historic buildings but vacant and obsolete buildings.
Conway said adaptive reuse generally costs about 15% to 20% less than new construction and can be faster to complete. Support systems such as water and sewer and electricity already exists at the site, for example.
Tenants in these buildings tend to stay longer than in new space and spend more on improving the space, he said, adding that “they’ve made a very conscientious decision” to go into the space.
The projects also help with green and sustainable building, particularly when trying to get LEED certification.
“Because of the whole climate activity, rehabbing an existing building puts you way ahead on lowering your carbon footprint,” McMahon said.
Challenging Project
In the opening of a documentary done on Crosstown Concourse, Lafayette Draper, a former Sears Crosstown employee, sitting in the building before the rehab, said he wanted to see the building come back, that it would do the community a lot of good.
“It’s a good structure,” he said. “It’s stout. Sure is. You could put anything in here.”
But it took a herculean effort to move forward and get the financing. Large historic projects like this are extraordinarily difficult to do primarily because of complexity in financing the deal, according to Conway.
Crosstown Concourse proved that and more. Conway saw it firsthand. Before becoming CCIM’s chief economist, he worked on the financing as senior vice president for credit risk management at Atlanta-based SunTrust Bank, now called Truist Bank and headquartered in Charlotte, North Carolina.
“You really have to have a local heavyweight” who has a philanthropic mind to get such large redevelopment projects done, Conway said.
He said the risky nature makes them a challenge for necessary underwriting to finance deals. Life insurance companies and other institutional investors typically have shied away from them as a result, Conway said.
There are four atriums in Crosstown Concourse created by removing portions of the old concrete floor. (Richard Lawson/CoStar)
With the former Sears building in Memphis, Staley Cates, vice chairman of Memphis-based Southeastern Capital Management, bought it in 2007 for $3.5 million with a philanthropic mission in mind.
A couple of years later, Richardson and a local artist, Christopher Miner, formed Crosstown Arts, a nonprofit organization with the goal of creating a contemporary arts center in the former Sears.
They completed a feasibility study by the end of 2010. People were skeptical it could happen, given that the country was coming out of the Great Recession, Richardson said. In fact, noted local developer Henry Turley told Cates that his best bet was to tear down the building and start over.
Turley’s prominent developments include Harbor Town, a new urban development on Mud Island across from uptown Memphis, and redevelopment of the Cotton Exchange built in downtown in 1925.
But Richardson and Miner pressed forward. They started with building community support by frequently having art shows and music performances outside and inside the building.
McLean Wilson, grandson of the Holiday Inn founder Kemmons Wilson, linked up with Richardson and Miner to help get the development and money side of it rolling. In 2007, Wilson had returned to his Memphis home and joined the family business, which had diversified beyond hotels into restaurants, technology companies and a brewery.
Tony Bologna, a local architect and consultant who had been director of development for Turley for Harbor Town and other projects, joined the development team along with Memphis-based architectural firm LRK and Dialog, an architectural firm based in Vancouver.
Pulling in Financing
Eventually, tenants such as the healthcare companies signed on, but they were skeptical too, Richardson said. Preleasing helped them slowly attract different funding sources.
The city of Memphis approved a $15 million investment in the project. SunTrust led the sourcing of $80.5 million that included seven other banks.
SunTrust Community Capital, an arm of the bank that deals with tax credits, handled the transaction that brought $56 million in new markets tax credits, a federal program that targets low-income areas that gives investors a break on income taxes. Dudley Ventures and four other firms were included in that $56 million.
New York City-based Goldman Sachs invested $36.5 million in historic tax credits for the project.
Once they got all of the commitments, they were running against a deadline of Dec. 31, 2014, to close all of the financing. If they missed the deadline, it would mean a large portion of the financing would expire. They worked deep into the month.
A bright-red staircase made of steel takes you to a second floor inside Crosstown Concourse. (Richard Lawson/CoStar)
Suffice to say, there were a lot of lawyers and bankers involved. Co-founder Richardson said that he and Wilson had a weekly conference call with 55 people, mostly lawyers, in the six months leading up to closing.
One change in a document rippled through everything. “There was nothing easy about pulling it together,” Dudley Ventures’ Howard said.
Conway said the city of Memphis decided late in the process that it wanted to own the ground under the building. That required a major change to create a ground lease, which wasn’t an easy task.
All of it got done with little time to spare. The developers broke ground on Feb. 21, 2015, the same day Sears broke ground on the original building in 1927. Construction finished in August 2017.
Elaine Parker, a property manager on the site for Cushman & Wakefield|Commercial Advisors said 40 tenants moved into the building about the same time that month. “It was really wild around here in August 2017,” Parker said.
Crosstown Concourse's impact has been felt. Nearby properties are seeing new life because the redevelopment and Crosstown Arts reaching directly into the surrounding neighborhood, according to Nash Hassen, owner of Grandpoint Realty.
Hassen represented a retail building a short walk away that Crosstown Arts leased, spent money on tenant improvements and subleased to Black Lodge, a popular independent video store with a film library of 30,000-plus titles. It sells monthly memberships for $10 and also has an event venue.
Big gains have come on the residential side as well. Hassen said homes you could buy for $20,000 to $25,000 before the redevelopment now sell for $100,000 to $150,000.
"I remember when people couldn't give a house away in that area," Hassen said.
