By  on March 14, 2005

NEW YORK — In nearly 100 malls in the U.S., the overlap of Federated and May store anchors — say, where a Macy’s and Robinsons-May operate side by side — will lead to a handful of Bloomingdale’s conversions, and more importantly, a healthy dose of store closings, which mall owners will happily embrace in order to fast-track the development of more modern malls.

The real estate investment trusts that own the majority of the 93 malls where both Federated Department Stores and May Department Stores have at least one anchor already are eagerly populating their shopping centers with “category killers,” discount stores and restaurants. A vacant department store is just what the REITs need.

Meanwhile, an analysis of the overlap by WWD revealed markets in Southern California, New Jersey and Philadelphia to be the likeliest targets for REITs to take back anchor stores. The analysis showed that, in the densest area of concentration, a merged Federated-May entity would operate more than one anchor store in 29 different regional malls in Southern California. The most common overlap in this market is Macy’s and Robinsons-May. In some malls, such as Fashion Island in Newport Beach, it would operate three anchors.

In New Jersey, the market with the next-highest level of overlap, there are nine malls with both Federated and May stores, mostly Lord & Taylor and Macy’s nameplates. In Philadelphia, seven malls overlap department stores, and in Boston, seven malls. Although preliminary terms of the merger deal indicate that most, if not all, of May’s nameplates nationally will be converted to Macy’s stores, in the majority of the malls with both Federated and May stores, a Macy’s nameplate already exists.

Across the board, the REITs that own these overlap malls are anxious about getting their hands on an empty store. They have plenty of ideas about what to do with the space.

For example, so-called “category killers,” such as Dick’s Sporting Goods, Borders, Barnes & Noble and Crate & Barrel, which focus on a single category of product and then dominate that market with big-box stores, are a large draw for consumers, but are normally built in clumps in power centers rather than in malls. Because they are so large, developers often don’t have enough land to add them to existing properties, but rely on bankruptcies and consolidations to give back underperforming department stores. Big upscale casual restaurants, such as Cheesecake Factory and California Pizza Kitchen, also are fitted into these spaces.Developers also have pounced on empty stores in order to capitalize on the recent demand for both luxury and discount goods from the same shoppers, adding a combination of traditional and atypical department stores such as Neiman Marcus and Wal-Mart to malls. Southern California, where The Westfield Group controls a significant chunk of the malls with both Federated and May stores, may see the most of this activity. The Australian-based REIT has lead the industry in adding both Target and Wal-Mart to its Shoppingtown regional mall format, and can be counted on to do more.

Simon Property Group, the largest mall owner in the country, has done all of the above. Richard Sokolov, president and chief operating officer, has said he would welcome the opportunity to buy back vacant department stores resulting from the merger, citing Simon’s success in converting underperforming Lord & Taylor stores into Neiman Marcus anchors or category killers. In 2004, the REIT added 32 new mall anchors and big boxes to their properties, including Dick’s and Barnes & Noble on the category-killer side, Target and J.C. Penney on the discount side and Nordstrom and Neiman Marcus on the luxury side. It expects more of the same in 2005, planning to add 22 more big boxes to its malls. The REIT will probably be the biggest recipient of empty former May department stores — it is the majority owner in nearly 30 malls with both Federated and May nameplates.

The Macerich Co., which owns 63 malls nationally, has gone after category killers, as well, adding 12 big-box stores and eight anchors in 2004. It owns 11 malls with anchors from both Federated and May, mostly in Southern California. “We have gone through each of our properties where we have overlap, and in virtually all of them, we think that there are significant opportunities for upside if there were to be a consolidation,” said Macerich president and chief executive officer Arthur Coppola in a company conference call. Given that the majority of his malls include both a Macy’s and a Robinsons-May, those opportunities may include converting the Robinsons-May to a Bloomingdale’s or bringing in high-producing big-box retailers and restaurants like a Dick’s or Cheesecake Factory.

CBL & Associates Properties, which owns 69 regional malls and is the biggest mall owner in the Southeast, reported a similar analysis. It only has one mall, the Monroeville Mall in Pittsburgh, with an overlap of Federated and May stores, but “both stores are performing well and we do not anticipate any material impact to our portfolio should a merger occur,” said Stephen Lebovitz, president, in a conference call. The Monroeville Mall has both a Lazarus and a Kaufmann’s. In looking at other major mergers, the REIT also has 66 Sears stores in its portfolio, but does not believe that a Sears-Kmart entity will close any of the mall-based stores based on an earlier statement from Sears.“We believe in the conventional department store very strongly and we think that it will continue to be a strong component in our markets,” explained Lebovitz. “There will continue to be rationalization, no question, and situations where the department stores have too much square footage in a mall. We’re working with them to figure out a way to reallocate that. But that’s a good thing. That’s an opportunity for us.”

The potential closing of department stores due to company consolidation will strengthen the market overall while hastening the modernization of the regional mall.

“This is very much a Darwinian retailing world that we live in,” said Macerich’s Coppola. “There are many, many department stores that have been consolidated amongst themselves and the net result for us is that our shopping centers overall have become stronger. Frankly, the barriers to entry [for development] have become higher because there are fewer department stores to fuel new centers, which therefore makes existing centers more scarce, drives up the values and drives up the rents.”

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