Malls are activity hubs
From their very beginning, shopping malls, as we know them today, have been more than simply shopping centers, they are retail destinations. They are places where teenagers go to meet friends and ogle the windows filled with items they hope to own someday. Seniors walk their broad promenades, using the tile lined pathways like an all-season season track for accumulating their “steps” and staying connected to others in their community. Of course, the masses go for the convenience of one-stop shopping for fashions, shoes, electronics, sporting goods and the food court.
Today’s malls are not unlike the open air markets of ancient Greece or the marketplaces of medieval Europe, commonly found adjacent to cathedrals. Like their long-ago predecessors, the more than 1500 malls built between the 1950s and today are gathering places for societies.
Despite the central role that shopping malls play to communities, Credit Suisse predicts that as many as 25% of U.S. malls will be gone by 2022.
Signals of the changing retail landscape
Deadmalls are a real thing in commercial real estate. There’s even an entire website dedicated to memorializing these foregone entities with stories and photos. Deadmalls are characterized by low tenancy, low consumer traffic and a general lack of contemporary appeal. Usually, these are older malls built in the 1970s that are now struggling to compete with newer malls. But, even malls built in the last couple of decades may find it difficult to compete with those that offer more modern features and a more unique or varied set of stores.
Typically deadmalls arise from the closure of an anchor store which results in the cascading departure of other, smaller tenants that are now able to break their leases. Recently the downward spiral of brick and mortar retail has hastened this. In 2017, Credit Suisse projected that nearly 8,600 stores would close, including many of the vanguards of mall retailing like Limited, Pay-Less, Radio Shack and Sports Authority. Uncertainty surrounding retail giants Sears and Macy’s could have some additional impact this year.
A mall eat mall world
It’s easy to want to blame the fate of malls on major economic factors like declining populations, rising minimum wage and the rise of Internet-based shopping. Without a doubt, those factors are part of the story. So too are societal factors like the demand for malls to be filled with a broad spectrum of consumer-centric amenities like healthcare services, movie theaters and play areas for entertaining shopping-weary children.
A somewhat overlooked factor, however, leading to the demise of some malls, is the development of new malls contributing to the general congestion of the retail space. As proof of this congestion, it was recently reported that CoStar Realty Information estimates there is 2,353 square feet of space of shopping centers in the United States for every 100 Americans. That’s roughly twice the amount enjoyed Canadians and almost six times the amount for British consumers.
As nearby properties continue to be developed into new shopping space, a once-dominant mall will likely struggle to compete. In a specific case in Austin, Texas, million square foot Highland mall lost its J.C. Penney store in 2006, according to Morningstar. When the nearby Domain in North Austin center opened a year later, many shoppers abandoned the older mall. Eventually, Highland lost Macy's and Dillard's and was eventually closed.
The Future Isn’t Necessarily Bleak
As more malls face the pressures of retail congestion, there will undoubtedly be adjustments and a rethinking of the retail landscape. Likely, the third, fourth or fifth mall in a DMA will struggle to survive, but it may not be impossible. Building owners will need to consider alternatives uses for the space that may include medical office space, gyms, warehouses to support online retailers or re-configuring the space to attract freestanding retailers like Home Depot or T.J. Maxx. Owners of class A and class B malls will need to ensure that they're located in affluent, highly populated markets that are hubs for economic, transportation or tourist activity to continue to thrive. Additionally, backing from cash-rich operators will help to keep the mall up-to-date and adapting to the changing times.
Scott Voltz, MAI, AI-GRS, CEPA, MBA
35 year investment real estate professional