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The Price For Overbuilding Is Coming Due

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Future Of Malls? The Price For

Overbuilding Is Coming Due

Pamela N. Danziger Senior Contributor

I study the world's most powerful consumers -- The American Affluent

Jan 9, 2018, 09:13am EST

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As malls lose not just their anchor tenants but in-line tenants too, people have fewer and
fewer reasons to shop there.

In the final analysis, malls have to adopt a whole new business model, one focused on
the consumers and shoppers, not on stores and leasing spaces.

Shopping mall SOURCE: BURST.SHOPIFY.COM

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8/1/22, 10:21 PM Future Of Malls? The Price For Overbuilding Is Coming Due

Just as we welcome the New Year with retail sales up 4.2% through November and early
reports from Mastercard SpendingPulse that retail sales rose 4.9% from November 1
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through Christmas Eve, Green Street’s Advisory Group comes out with a new white paper
suggesting that shopping malls are not out of the woods yet, not by a long shot. If authors
Jim Sullivan and Otto Aletter’s analysis is right, the retail apocalypse may not even have
started as the price for retail overbuilding is shortly coming due.

Business Insider just gave early warning that the trend of massive retail closings will
continue this year. Through September 2017 Business Insider counted some 6,403 store
closures and while it predicts that retail closures will slow in 2018, the trend is hardly
over, with another 3,600 by early count slated to close.

And these are just the announced closings, as the report from Green Street’s Advisory
Group indicated. Many more retailers have shuttered mall stores on the Q.T. In its
analysis of 950 malls, of the top 25 national retail tenants that closed stores in 2017, about
half (more than 1,200) were retailers that made no public announcements but went out of
the malls quietly. To which, Green Street’s Advisory Group concludes, these silent closing
“present a significant risk factor to the sector.”

The list of silent retail closings includes Stride Rite, Hallmark, Subway, Regis Salon,
Things Remembered, Claire’s, MasterCuts, Men’s Warehouse, Bakers, Kenneth Cole, The
Body Shop and Papaya. These are mall’s in-line tenants, less visible than the anchor
tenants, but the very ones that Green Street considers a bellwether of the health of mall
properties.

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“Given that in-line tenants have a higher rent per square foot burden and have shorter
lease terms, these trends will often occur long before any anchor closing announcements,”
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the report from Green Street’s Advisory Group states. “Although department store
struggles have dominated headlines, they provide only a small portion of a mall’s net
operating income (NOI) because many anchor tenants own their stores or pay little-to-no
rent. In-line tenants, therefore, have an outsized impact on mall NOI, and their
performance offers a preferred indicator of mall health.”

And while the report notes that there are still retailers opening locations, some 775 stores
by their count including expansions by H&M, White Barn Candle Co., Francesca’s, Finish
Line, Alex and Ani, Build-a-Bear Workshop, Pandora, ULTA, Lululemon and others, in
the final analysis more national retailers are closing stores than opening them. So the
competition to backfill in-line mall locations with new tenants is intensifying.

About these potential new tenants, the report says, “are being more discerning about mall
quality and ownership and they are opening stores at a slower pace than seen in the past
from successful retailers.” So the competition for new tenants is fierce with many of the
better malls already home to national retail tenants with few new prospects available,
while the lower-quality malls are simply not able to retain existing tenants or attract new
ones.

The result is, “Landlords now must work harder at building relationships with more
selective tenants, with each tenant representing a small proportion of overall demand.”

Mall’s pain is spread fairly equally

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For the nearly 1,000 commercial mortgage-backed securities (CMBS) malls studied, the
A+ classified malls are doing better than others, but still losing rather than gaining
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tenants. In all, over two-thirds of the malls studied saw a decrease in the number of
national tenants. “While the sector trend is certainly negative,” they write, “the malls
experiencing outsized national tenant vacancies are more likely to experience rapid
deterioration or need significant capital investment.”

These trends are setting up a vicious downward cycle. As malls lose not just their anchor
tenants but in-line tenants too, people have fewer and fewer reasons to shop there. 
The result is that C and D malls get even weaker, with B malls potentially slipping into the
C and D category, and even the A malls struggling to attract new tenants, who will
demand more concessions from the mall operators, who then get weaker and so a
downward cycle goes.

The report concludes, “The key take away is that it’s hard to assess what real estate is
worth in the retail sector today. In-line tenant activity can provide a window into
individual mall health. Understanding which malls are most at risk in a timely fashion is
key to anticipating possible ‘death spirals,’ where malls can lose as much as 90% of their
value (much more than other property types.)”

What’s next for malls

In a provocative article entitled “Rumors of the Mall’s Demise Are Greatly Exaggerated.
Just Look at Miami!,” by fellow Forbes contributor and managing partner of the retail
advisory company RSR Research, Paula Rosenblum writes, “It is up to the mall operator

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to draw foot traffic into the mall and give retailers within it an opportunity to take
advantage of that foot traffic.”
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The call is for mall operators to find new, different ways to engage customers. And that
seems to be the sticking point. Mall operators must think about their businesses in new
ways. Their primary job is not about real estate any longer, but transforming their
business model to one focused on attracting shoppers so that they can then attract
tenants, not the reverse as in the past.

That takes mall operators to adopt a whole new business model. Here is where they
should start:

Deeply understand the needs and desires of shoppers in the local

market

Mall operators tend to rely primarily on basic demographic data to assess the
opportunities in particular markets. But demographics, such as the numbers of
households, income distribution and household composition, only tells part of the story.
And with incursion of ecommerce, shopper demographics are even less important now
that ever in assessing the potential to attract shoppers to a particular mall.

Most communities are not experiencing a huge influx of people ready to patronize new
stores and malls. Rather most mall operators must capture new shoppers by pulling them
away from their current shopping patterns.

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So mall operators need to delve deeply into their communities to understand where their
best prospects are currently shopping and what kinds of mall shopping experiences would
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appeal to them enough that they will change their current habits and adopt new ones. And
changing people’s ingrained habits is not an easy task by any means.

Think of the mall space differently

Already malls are trying to reinvent themselves around a more community-centered

model, adding community-based services like medical facilities, fitness and workout
centers, residential, offices, hotels, theaters and other attractions, not to mention more
restaurants and pubs and elevating the food court into food halls. But retrofitting malls
into community centers takes major capital investment with an unknown return.

Peter Muoio chief economist and head of research at Ten-X, a commercial real estate firm,
says “The question becomes ‘what else can this space be used for?’” and suggests one
option is to become a last-mile distribution center for retailers with pick-up and return
services.

Other ways malls could reimagine their spaces is to create a local Main Street experience,
filling empty spaces with local retailers offering locally-sourced products. Mall of America
has been successful thinking more locally with its Minnesot-ah! boutique and its MOA
owned and operated Debut shop that fills the gap in clothing, accessories and home goods
brands not currently offered by any existing tenants with featured brands rotating in and
out regularly.

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And for more on ways to reimagine mall spaces, commercial real-estate firm
Transwestern published a study looking at the trends in the reuse of malls that gives an
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excellent overview of the options.

Market differently, not about the mall but about the shoppers

And as I review mall marketing strategies, they seem to be cut from the same cloth. The
malls’ marketing messages are focused on the mall and what the mall has on offer, not on
the customers and shoppers and what’s in it for them. The standard mall marketing model
is push oriented and focused on the 4Ps – Product, Price, Promotion, Placement. It needs
to be transformed according to a pull approach around the new 4Es model of marketing –
Experiences, Exchange, Evangelism, Everyplace.

Mall marketing needs a complete revamp from its current positioning that says “Come to
the mall to find this or that store and this or that stuff,” to stories about why people should
visit and what wonderful experiences they will discover in exchange for their valuable
time. As Rosenblum said in an interview with USA Today, it is "less about stores and more
about experiences. Malls must become centers of activity where people can come and
actually find a reason to be there besides shopping.”

In the final analysis, malls have to adopt a whole new business model, one focused on the
consumers and shoppers, not on stores and leasing spaces.  Malls need to make
themselves relevant again to their local communities.

It’s going to take hard work and a major investment to accomplish that. The question is
will they commit to implementing the necessary changes. If they take too long, they may

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well run out of time and money.

Follow me on Twitter or LinkedIn. Check out my website or some of my other BETA

work here. 

Pame Pamela N. Danziger

N

I am a market researcher, speaker and author focused on the affluent consumers’ behavior and
mindset, including the HENRYs (high-earners-not-rich-yet) mass affluent. I founded... Read More

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