December 18, 2020
America’s Malls Spiraling Towards Sweeping Reset
It’s coming — an unprecedented reduction of shopping center square footage.
Industry pundits and prognosticators expect about 25 percent of America’s shopping centers to vanish in the next four to five years, driving developers and landlords to repurpose outmoded formats and square footage left vacant by bankrupt and downsizing retailers.
While not seen reaching “apocalyptic” proportions, “A correction looks overdue,” said Deborah Weinswig, founder and chief executive officer of Coresight Research, in her report on malls issued earlier this month. “The rationalization of physical stores has lagged the migration of sales online. In turn, the rationalization of mall space and mall numbers have lagged store closures.”
“There’s no question there’s going to be material rationalization across the whole spectrum, and that’s all the product categories within our retail sector,” observed David Simon, chairman, president and ceo of the Simon Property Group, on a second-quarter conference call. “So it will be malls, strip centers, certain outlets, power centers, lifestyle centers. It’s hard to put a handle on it.
“I think the bigger thing will not be so much whether it’s 20 or 30 percent. It’s just that it’s going to happen — like now. A lot of the time you had product that was limping along for a while. That half life has shortened over the last five, six, seven years. Now it’s like immediately short. And so you’re going to see a rationalization, without question — and it’s going to happen quicker.”
“One in four malls is expected to close in the next five years,” said David Bassuk, global retail practice leader of AlixPartners. “It’s really a challenging situation for all parties involved. So where do we go? We need to find new business models to survive and compete.”
Malls have been hurt by mounting store closures, the Internet siphoning away sales and foot traffic, decades of overexpansion, and too often, a disconnect between what consumers want and what they offer.
“In the last three years, 28,000 stores closed. This year 25,000 will close, and over 75 percent of those closing are mall-based retailers,” Bassuk said. “Going forward, much of this pandemic-created shift in consumer behavior is going to be permanent. For years we’ve been saying that the U.S. has been overstored and there’s too much square footage of malls.”
There are 8.5 billion square feet of retail space in the U.S., which equates to 24.5 square feet of retail space per capita, or five times Europe’s average of 4.5 square feet per capita, according to the Lincoln Institute of Land Policy.
In 2017, there were about 116,000 shopping centers of different varieties in the U.S., compared to 30,000 in 1970, according to Statista, a German company that specializes in market and consumer data.
While Coresight and other industry sources have recently issued dire predictions for the industry, they’re not the first. Back in 2017, Credit Suisse estimated that of the 1,211 traditional malls in America at the time, a quarter of them would disappear by 2022.
The shakeout of both stores and malls leaves developers and landlords scrambling to win back visitors and transform remaining square footage. The answer lies in embracing formats they’re not accustomed to — dental clinics, gyms, fulfillment centers, apartments, digitally native brands seeking to expand offline, and bringing what’s indoors outdoors, like restaurants, park space and exhibits.
According to a report from Placer.ai, a foot traffic analytics firm, a Planet Fitness gym that opened in the Mondawmin Mall in Maryland in January 2019 was instrumental in the mall’s year-over-year foot traffic rate turning around from negative 4.1 percent to plus 0.5 percent. When another Planet Fitness gym opened in the Holyoke Mall in Massachusetts in January 2020, the center saw a year-over-year 22.58 percent jump in visits. Gyms, as well as groceries, are especially valuable to malls because they bring traffic in on weekdays, when there are usually traffic lulls.
Co-working environments are starting to fill some vacant space left by failed retailers. Industrious, a co-working company and custom office purveyor, moved into a former Barneys New York store in Fashion Square in Scottsdale, Ariz.
Developers have started to create stretches just for pop-ups, or just for local businesses, to bring some distinctiveness to the properties. “There are a lot more things happening to give local vendors a chance,” said Kathy Gersch, executive vice president of Kotter International. “There will be more pop-ups, some will highlight local vendors, some may be more traditional pop-ups. We are also seeing restaurants taking over space in parking lots.” Shopping center operators are “unleashing creativity,” Gersch added.
“People still want that feeling of togetherness. They miss the people watching,” added Joan Insel, vice president of global retail, brand strategist, at CallisonRTKL.
“It’s likely we will see more activity-based formats, everything from an actual skating rink to Peloton, or climbing walls, and Lululemon, which isn’t just about selling apparel,” said Bassuk. “These are things that keep people staying longer.” Shops selling athletic apparel and sneakers also continue to be destinations, he said.
Developers are buying up ailing retail chains is an emerging trend. Simon and Authentic Brands Group teamed up to buy Brooks Brothers, Lucky Brand Jeans, Aéropostale and Forever 21, with Brookfield Property Partners also in on the Aéropostale and Forever 21 deals. Most recently, J.C. Penney’s retail business was bought by Simon and Brookfield and ABG is expected to become involved in that deal, too.
Apparently, there’s more to the acquisition strategy than just trying to keep up occupancy rates and prevent other retailers from exercising co-tenancy clauses to vacate a mall when an anchor retailer closes. As Simon said, “We do a lot of research. ABG has been a very good partner. They know how to blow out the license aspect of it, which we’re a partner in. We get out of bad stores. We buy the inventory at a discount. We right-size the overhead. And we operate with better business judgment, and lo and behold, you suddenly have a business that’s got significant positive EBITDA and you haven’t paid much for it.”
Simon recently disclosed it was shedding ownership of four struggling malls. “There’s a lot of excess capacity in our retail real estate industry, but I think we’ll hold our own,” said the chairman.
According to the International Council of Shopping Centers, the occupancy rate for malls has dropped to 88.7 percent in Q2 this year, from 92.4 percent in Q1 of 2018. Regional malls alone dropped to an 86.2 percent occupancy rate in Q2 this year, from 90.4 percent in Q1 of 2018.
The apparel sector has been a particular drag on malls, with Coresight estimating that the proportion of mall space occupied by apparel stores will fall below 40 percent this year, from 45 percent in 2016.
Shopper traffic is down anywhere from 25 percent to 50 percent due to the pandemic, according to industry reports. Enclosed malls have been hit the hardest, followed by strip and outlet centers. Traffic won’t pick up until millions and millions of people get vaccinated and the coronavirus subsides. But for now, as cases of COVID-19 spike nationally, the CDC last week recommended people avoid indoor shopping. Another round of lockdowns is likely in some regions.
Critical to mall survival is making greater use of outdoor space, for pop-ups, package pick-up and return stations, exhibits, outdoor dining, or even drive-in movies, which Walmart rolled out last summer.
Open-air centers have the advantage over enclosed malls. They’re perceived as safer from virus spread and better designed for social distancing and socializing.
“It’s an outing for the day and that’s what everybody needs,” said Samantha David, president of WS Development, describing the appeal of her company’s open-air properties, which include the Royal Poinciana Plaza in Palm Beach. She believes the settings are taking market share from enclosed malls and high streets.
“We have been able to successfully accommodate some amount of congregation with stringent safety measures. It’s not groups congregating, It’s congregating within your own group. Folks are taking precautions but also enjoying themselves,” said David.
“At the Royal Poinciana, you can have a cup of coffee, sit outside in a beautiful courtyard with palm trees, hang out with the kids on the lawn. It’s the same with our properties in Boston and Tampa,” respectively, the Boston Seaport, and Hyde Park Village lifestyle center. “People can find that fresh air and relaxation, almost like being around parks. At the same time, they buy what they want and eat what they want.”
Last June at the Royal Poinciana, there was a program for retailers to bring merchandise outside. “It became a nice community event, an excuse to go with a friend, and it did draw people inside the stores,” said David. There have also been classes for kids in conjunction with the Palm Beach Ballet and other cultural institutions.
Ironically, the Royal Poinciana had its best summer ever, David said, helped by northerners moving to Florida and having a wide catchment area, including West Palm Beach, Del Ray and Boca Raton.
At the Boston Seaport, “We opened 10 businesses during the pandemic at a time when Newbury Street [Boston’s upscale retail venue] has really struggled,” said David. “The Seaport is on the water, there’s a nice lawn for sitting, and we planned some extraordinary things for holiday. As long as you’re doing great activations that are safe and outside, people will come.”
“Operating in an open-air environment has been our model for over 30 years, but it has never been more relevant than now,” said Jackie Levy, chief business officer of Caruso, the Los Angeles-based real-estate development and hospitality company. “The expansive footprint of our properties has allowed our restaurants to uniquely expand their al fresco dining areas and thrive during what has been a very challenging time for the hospitality industry. It’s been well documented that sunlight and fresh air allow for one of the safest environments.”
To encourage shopping, Caruso for the holiday season implemented “Store-to-Door,” a tactic that blends online with brick-and-mortar, at The Grove, The Americana at Brand and Palisades Village, all centers in Los Angeles. It enables shoppers to book one-to-one appointments to virtually shop many of the brands on those properties and receive same-day delivery. Orders could also be placed online from a selection of “must-have items.”
While Caruso’s Store-to-Door service was a response to the impact of the pandemic, consumers will expect that and other such services to continue well after the health crisis passes.
This year, Trademark Property Co., based in Ft. Worth, Tex., brought in experiential marketing guru Chuck Steelman as vice president of experience to create “meaningful engagement” at Trademark’s 16 shopping centers and rethink events to reduce crowd size. For example, for decades large crowds came to Trademark’s Galleria Dallas to Christmas tree-lighting celebrations, where Olympic and World Champion figure skaters performed through the holiday season. But due to COVID-19, instead of hosting the free public shows with unlimited attendance, the Galleria partnered with the Dallas Children’s Advocacy Center to create a private, socially distanced event featuring Olympic Bronze Medalist Mirai Nagasu, with families assigned to pods for privacy. Steelman recognized that many nonprofits would find it difficult to engage with audiences and solicit new donors, so he helped Galleria Dallas become “a community asset” rather than simply a retail center.
Steelman also created virtual trunk shows for the Galleria, involving designers, celebrities, authors and community leaders. In the Zona Rosa center in Kansas City, Mo., which had a long-standing tradition of breakfast with Mrs. Claus, Trademark last week had a drive-thru pajama party distributing breakfast in bags, story books, and socially distanced meet-ups with Santa.
“I don’t think the death of retail idea is relevant,” said Gopal Rajegowda, partner of Related Southeast, a regional mixed-use division of Related Cos. “People want to get out and have experiences. There is opportunity for brands to invest in great experiences, which will drive their revenue. Restoration Hardware creates an experience, rather than simply being transactional. Lululemon gets fitness enthusiasts in every day to take a class. Or you may go to Sur La Table and take a cooking class. You want to be around that kind energy and vibe. I feel strongly that if brands don’t pivot to an experience model they are not going to be relevant. That’s not easy, but it’s got to be more than just buying a shirt.”
RH is an anchor at Related’s Rosemary Square, formerly called CityPlace, in West Palm Beach, Fla. “The original project was designed as a lifestyle center and was very pioneering at the time it opened in 2000,” said Rajegowda. “It just so happened this lifestyle center was in the middle of downtown, so we acquired land sites and pivoted the property from a lifestyle center to an exciting downtown mixed-use center. We focused on [creating] great vibrant public spaces and great outdoor space, redid the streetscape and all the public space areas with landscaping, created great shaded areas for walkability and connectivity and layered in a public art program. Now we are building out those land sites to add more density to the neighborhood.”