United States

Malls in America: Ruin or renaissance?

INSIGHT ARTICLE  | 

If you believed everything you’ve read and heard about the plight of the American mall you’d think these structures were crumbling ruins with tumbleweeds blowing through the parking lots. Granted there are some casualties. Due to overbuilding in some regions, a shifting consumer population, preferences in shopping experience, the rise in online retail shopping, the closing of traditional anchor stores like JC Penney and Macy’s, some malls have sadly met their demise. However, others have emerged to meet the growing needs of consumers in a new and successful way, and in some cases, actually redefining what a mall is.

What’s the real story here? While 51 percent of Americans say they prefer shopping online, according to Big Commerce, the reality is just 10 percent of the approximately $3.3 trillion in annual retail sales last year came from online transactions, according to Realtor Mag and Forrester Research. Clearly someone is still shopping in brick and mortar stores. And despite the gloomy depiction of the declining shopping center, mall real estate investment trusts (REIT) outperformed the REIT index by 2.4 percentage points, according to a recent Barron’s article. This bump came on the heels of commercial and retail real estate companies, Simon Property Group and GGP, both indicating on their earnings calls earlier this year that demand for class A malls— higher-end, elite shopping centers—remained healthy. Given this, rather than a marketplace in ruins, one might wonder whether malls are actually experiencing a renaissance in many instances.

So what’s truly happening with the transforming mall? RSM’s Michael Schwartz, national real estate consulting leader, and John Nicolopoulos, national practice leader for the retail and restaurant sectors, share their insights.

How are malls changing?

Michael: Many class A and B malls (regional shopping centers with middle range sales) are surviving, despite a tough retail environment. Successful ones are readjusting focus, however, due to anchor store departures or downsizing, reconfiguring smaller floor plans within these larger department store spaces. So, for example, a Macy's store that used to be three stories high might be reduced to two stories, with in-store online ordering to address reduced inventories, and one of the floors converted to a different use that makes sense for that market. I’ve also seen some creative space transformations like repurposing unused parking lots into places for growing locally and sustainably produced food that benefits the shopping center tenants, customers and community. Likewise, I’ve seen traditional malls now leased to tenants for community college classrooms, medical clinics, spas, fitness centers and numerous pop-up and seasonal shops. And, some newly constructed malls offer lifestyle centers and destination places for not only traditional retail shopping but experiential uses like eclectic restaurants, grocery marketplaces, entertainment, live events, music, nightlife and more.

John: Malls are evolving. As consumer preferences continue to shift toward experiences and away from things, sellers of things need to create better experiences to get the consumers attention, hence the rise of experiential retailing. Mall operators are tracking the shift and responding, creating gathering places that are comfortable for shoppers to visit and make for a more pleasurable overall shopping experience. Open-air designs, eye-pleasing landscaping, fountains, creative lighting, art installations and eco-friendly types of construction are all leading trends for newer malls, creating shopping areas that are visually appealing with inviting areas to gather and shop.

The mix of tenants is certainly also changing. As Michael points out, many traditional anchor tenants are closing or rightsizing their space. We see branded specialty retailers dominating traditional store fronts and more restaurants and other lifestyle brands moving in with the hope of creating a destination that allows the shopper to come and spend the day.

Are consumer buying trends dictating mall transformation?

Michael: While consumers can buy most things they need online, for some items buyers are still going to stores to make purchases. For instance, the millennial generation, currently the largest consumer group, is getting older, and with that some are beginning to start families, establish homes, move from cities to suburbs for better affordability and thus are going to regional malls on the weekends to do their shopping because they might need a sofa, a book case, a crib, some linens or other items to furnish their homes. And while they’re at the mall they might enjoy dinner at one of the restaurants there, or a beer, or they may pick up groceries or other essentials. The changing needs in this demographic impact the changes and offerings we’re seeing in malls.

John: They absolutely are. Although some reports suggest online retail sales represent less than 10 percent of total retail sales, that statistic includes retail sectors that don’t lend themselves to effective online selling and do not typically operate in a mall environment. For many retail sectors that have historically relied heavily on mall locations, that number is likely much higher, contributing to the decline in mall traffic over the past several years.

At a more granular level, there has been a shift in buying behaviors since the great recession. People continue to be more price sensitive and they also want to spend more of their disposable income on experiences rather than products. The consequence appears to be the continued growth of discount stores and outlet malls, and declining traffic at traditional malls.

The re-urbanization of many U.S. cities also has also had an impact. In many cities, millennials and empty nesters are choosing more urban locations over suburban locations, which has given rise to revitalized neighborhoods within these cities and the rise of lifestyle centers on the edges of these cities.  Retailers and restaurant operators have responded to the trend of opening in downtown locations and lifestyle centers, and in many cases, creating shopping and entertainment options that significantly reduce the need for its residents to visit a mall.

For owners, landlords and investors, are malls providing growth opportunities?

Michael: It depends on the type of mall and where. For class A malls we continue to see business growth and investors are interested, but class B and C malls can be problematic depending on the tenant mix and location. There are many variables that can impact the success of these malls. For instance, some are subject to outdated contracts and zoning agreements that may not allow property changes to meet the needs of consumers. These restrictions can be costly if litigation is needed to make changes. These types of challenges delay growth or sometimes halt it indefinitely. We have seen a small group of real estate investors and operators who see prime opportunities in dying class C malls. These operators look to purchase dying malls on the cheap, make small improvements to revive the properties, and bring them back to life.

What’s essential in ensuring success for today’s mall?

Michael: Location and retail mix are obviously important to weigh. In addition, tax considerations and incentives as well as financing options must be deliberated for future projects. Today’s mall must be positioned to adapt to an ever-evolving marketplace. Owners will need the ability to finance growth plans to meet overall strategic objectives as well as consumers’ changing needs.

John: For retailers, it really starts with a deeper understanding of the customer. Specific demographics, lifestyles and buying behaviors and preferences should drive retail channel strategies. For years, many retailers relied on larger retail anchors to drive traffic to the mall and, indirectly, to their stores. That model is clearly changing. Today’s retailer needs to adjust their strategy to appropriately balance their reliance and investment on the channels their customers want to shop. In many retail sectors the trend is toward greater online investment and less reliance on physical retail space as a direct selling channel.  However, few are abandoning bricks and mortar entirely. They are selectively closing or rightsizing underperforming or marginal locations and some are investing in remaining units to enhance customer experience and drive their brand.

At a macro level, the keys for success of the mall operator and the retailer are the same. Location and retail mix will continue to drive the day. For retailers relying on fewer physical stores, locating in retail space that meets the needs of their specific customer base will become even more important and providing complementary retail or other lifestyle brands may help drive traffic as the anchors had in the past.

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Richard Edelheit
National Real Estate
Practice Leader
800.274.3978