Shopping Malls Rethink Their Business to Survive
By Jason Costello, SVP, CRE Division Manager
February 23, 2017
It’s a new day for shopping malls—at least for those whose owners, developers and managers who think creatively to survive. The future has looked bleak for malls in recent years as customer foot traffic and sales have dropped dramatically. The real-estate research firm Green Street Advisors anticipates that same-tenant sales in malls will grow just 1.2 percent between 2016 and 2019, a number it adjusted downward from its 2015 forecast of 2.6 percent growth over the same period, and a marked decline from 4 percent actual growth in 2015. The firm also noted that it expects market rent growth of 1.5 percent through 2019, compared to its prior forecast of 2.5 percent growth.
The after-effects of slowing mall business are significant. Anchor stores such as Macy’s, Sears and J.C. Penney have made headlines with plans to close stores. Macy’s will shutter 100 stores in the next few years, in addition to the 40 stores the department-store chain has already closed. In the first quarter of 2017, closings include two Macy’s stores in Wisconsin (at Oakwood Mall in Eau Claire and at Valley View Mall in La Crosse) and three in Illinois (at the Alton Square Mall in Alton, the Stratford Square Mall in Bloomingdale and the Eastland Mall in Bloomington).
When anchors leave, smaller stores suffer without the foot traffic that the bigger retailers draw. As a result, small merchants are closing, which leads to malls that cannot survive. In fact, nearly one-third of U.S. malls are expected to close permanently in the coming years, retail analyst Jan Kniffen told Forbes.
Where Have All the Shoppers Gone?
A number of factors are causing the mall die-off. Shoppers’ habits are changing. Many have grown accustomed to bargain hunting, spurred by discount retailers such as TJ Maxx and online giants like Amazon. Consumers love the convenience of online shopping. During the 2016 Thanksgiving weekend, the National Retail Federation found that 108.5 million Americans shopped online, compared to 99 million in stores. Amazon had the biggest share of that online pie—30.9 percent. Best Buy had the second biggest online slice (albeit considerably skinnier) at 7.4 percent. Macy’s enjoyed just 3.9 percent of online sales that weekend. Shoppers are also spending more on experiences instead of material goods. They are choosing to spend their discretionary income on activities such as travel, dining out and other forms of entertainment.
A Unique Opportunity to Rebalance
So what are mall owners and commercial real-estate companies doing to fill the tens of thousands of vacant square feet in malls, now and in the future? Steve Jellinek of Morningstar Credit Ratings says that higher-end malls are surviving, but those that serve lower- to middle-range customers face the greatest threat of closure. The savviest actually see this as “a unique opportunity to rebalance,” as the owner of the Irvine Spectrum Center told the Los Angeles Times last fall. This mall in Irvine, Calif., decided to look for 20 smaller tenants to replace Macy’s, instead of trying to find one big tenant. It demolished Macy’s 140,000 square-foot building and is constructing a new one to house smaller tenants in a $150 million project.
Some malls are looking for internet-proof tenants, such as gyms, urgent-care clinics and restaurants, which play into the experiential trend as well. Some are replacing outdated food courts with gourmet food halls. Taubman Centers is spending $500 million to renovate the Beverly Center mall in Los Angeles to house more upscale food outlets and bring more natural light into the eight-story building. Oakbrook Center in Oak Brook, Ill., recently finished an expansion and renovation project that added an AMC Theatre, a new food district and three sit-down restaurants. Hawthorn Mall in Vernon Hills, Ill., has updated its complex with an AMC Theatre and a Dave & Buster’s restaurant.
Elsewhere, a mall in Port Orchard, Wash., now houses mini-storage spaces. The Florida Times-Union reports that a Jacksonville, Fla., mall was converted into a medical center several years ago, and the former Shannon Mall in an Atlanta suburb has become a 25-acre campus for film and television production—a $100 million project.
In perhaps the most elaborate example of a mall seeking to ensure its future through internet-proofing—and capitalizing on consumers’ desire for entertainment—the Wonder Falls Resort is planned for the long-vacant Rainbow Centre Mall in Niagara Falls, New York. This $150 million project is a joint undertaking of the city, the State of New York, and the developer, Uniland Development Company, that will create a locally themed complex with an indoor waterpark, a new hotel tower with rooftop dining, a Daredevil Adventure Center, an indoor family amusement facility, and retail and food outlets.
At the opposite end of the spectrum, some mall owners are actually benefitting from the internet and high-tech revolution. Developers have turned a mall in Mountain View, Calif., into a 500,000 square-foot office complex, where Google has a lease. CBS News recently reported that a data-center company now occupies a wing of the Marley Station Mall in Baltimore. Data centers have also moved into closed stores in Indiana and Mississippi, while Rackspace has renovated two shuttered malls in Texas that this data center and hosting company will use as office space.
Economical Ways to Boost Foot Traffic
Not all commercial real-estate developers and owners can or want to undertake such complex projects, which require wholesale demolition and replacement of major mall buildings or sweeping reconfiguration of interior walls, fenestration, and plumbing and electrical at the very least. Other mall owners have found creative alternatives for filling existing vacant space and boosting shopper traffic.
Some retailers are expanding their online presence, which may lead to scaling back of their brick-and-mortar retail space—but it’s also bringing customers into stores to examine, try on or purchase merchandise they’ve seen online, pick up online orders, or make exchanges and returns in-store. These visits can prompt them to make further purchases. Conversely, more online retailers without a physical store presence are opening up brick-and-mortar stores to boost visibility and shopper convenience. Mall owners and developers who recognize these trends can support current retail tenants with mall-wide marketing programs that promote the convenience of visiting favorite retailers’ stores, while they also pursue opportunities with online retailers that could benefit from physical locations and the local-market expertise that they offer.
Other malls have lured lucrative high-tech retailers to their spaces, including Apple, Microsoft and Tesla stores. These sleek stores have strong sales and are supplanting department stores. According to the Wall Street Journal, electric car maker Tesla Motors’ showroom at the Bellevue Square mall outside Seattle had sales of $5,500 per square foot in 2015, more than five times the mall’s average, a pace that was likely a U.S. record for any retailer, the mall’s owner, Kemper Development, says. Westfield Corporation’s Peter Lowry notes that its high-tech tenants do very high volumes and boost the company’s sales per square foot. Westfield has 16 Apple stores, six Tesla showrooms, and six Microsoft outlets in its 38 U.S. malls.
Temporary stores—also known as pop-ups—are yet another opportunity for mall owners to fill space, attract shoppers and boost revenue. Westfield and Simon Property Group have dedicated more staff and mall space to short-term stores, as reported in the Wall Street Journal. What began as opportune stores selling seasonal or holiday merchandise at Halloween and Christmas has evolved to include a rotating cast of year-round temporary outlets, sometimes in sections of a mall dedicated to these spaces. Some of these are online retailers that want to experiment with a brick-and-mortar location. Others want to introduce local brands to shoppers, perform product demonstrations or offer consumers an elite selection of products. Mall owners that wish to attract such tenants can emphasize the opportunity for face-to-face interaction with shoppers. They can also lease out this space for special events or co-working businesses.
The pop-up stores are popular with retailers when leases are flexible, affordable and offer shorter terms than typical 5- to 10-year leases. Some malls design store concepts for the physical space, including plain “white box” interiors that can be used by consecutive temporary tenants. The Wall Street Journal reports that these boxes are often smaller than regular stores, at 1,000 to 1,500 square feet. “They are using those to attract specialty retailers or local players who are intimidated by the whole rent structure,” says Nick Hernandez, managing director of the commercial real-estate firm Transwestern. The pop-ups eliminate the need to involve architects and contractors, which can be overwhelming and too expensive for small-business owners. And if they succeed, these temporary tenants can turn into long-term deals.
The Mall of the Future
So, where are malls headed? While no one knows for sure what malls will look like in 20 or 30 years, one new take on malls—the lifestyle center— certainly reflects what consumers hunger for. These are specialized centers, as defined by the International Council of Shopping Centers, that feature upscale chains of specialty stores, along with dining and entertainment in an outdoor setting. They are leisure-time destinations with an ambience that encourages lingering and features amenities such as fountains, street furniture, cobblestone walkways and antique-looking lighting. Lifestyle centers have been created in many affluent suburbs nationwide during the last 15 years, and often include apartments, condos, movie theaters and hotels. They feel unique, local and decidedly un-chain-like.
As the Urban Land Institute explored with commercial real-estate owners in its 2016 fall meeting in Dallas, the mall of the future will be “a micro-economy, which must be sustainable and competitive beyond the obvious challenges such as internet sales,” as observed by Kenton McKeehan, managing director of Hines, a global real estate investment, development and management firm, who attended the meeting. “Malls of the future must address consumers’ needs easily so that they don’t have to go elsewhere. The success of malls will be driven not so much by thin retail profit margins, but instead by a mix of uses.”
Disclaimer: The information contained within this report has been obtained from sources deemed to be reliable; however, we do not guarantee its accuracy. You should make your own independent evaluation of the relevance and adequacy of the information contained in this material and make such other investigations as you deem necessary, including obtaining legal, financial and/or tax advice. Back to top