By  on May 19, 2014

The mall is making a comeback.

After being nearly left for dead during the recession and declared irrelevant when consumers embraced e-commerce, shopping centers are enjoying high occupancy rates and strong foot traffic. Mall owners are reinvesting in existing properties — especially since there’s little or no ground-up development in the U.S. — and making them stronger and more attuned to shoppers’ needs. Some malls are building new wings where they can gather stores of the same ilk. They’re also stepping up services like valet parking, introducing more food and dining options, a trend that continues, and remerchandising with key sought-after tenants.

“The occupancy rates at shopping centers are well over 90 percent, almost back to where they were before the recession,” said Michael Kerchival, president and chief operating officer of the International Council of Shopping Centers. “Rents are rising across the board, and operating income is at a record high. There’s real fundamental health in the real estate.”

Excluding common charges, national average rents declined in the first quarter to $5.40 a square foot from $5.52 a square foot in the fourth quarter of 2013. Rents hovered between $4.57 and $5.09 from 2009 to 2012, according to the National Council of Real Estate Fiduciaries.

In light of the higher rents —both in shopping centers and on key streets — retailers are looking to stores to serve multiple purposes.

“Retailers are now thinking about the space differently,” Kerchival said. “There used to be a very simple formula where a retailer paid 30 percent of sales revenue earned before occupancy costs. That was a model landlords and tenants knew. If sales went up, a landlord could charge more rent. Now, retailers are using their space not only to sell products, but to market their brands and promote sales online.”

“We’re really focused on investing our capital in our dominant ‘fortress assets,’” said Robert Perlmutter, executive vice president of leasing at Macerich. “A big part of our strategy is reinvesting in ‘A’ assets to make them more dominant. We’re adding a department store or bringing in restaurants, in some cases.

“At Tysons Corner [in Tysons Corner, Va.], we’re adding mixed-use office, residential and mass transit through the [Silver Line] Metro station opening this month,” he added. “We see a phenomenon where retailers are paying premium rent for fortress stores and premium assets but are still supporting their own outlet and e-commerce businesses.”

There’s been a shift in malls toward more services and more food purveyors, “so the amount of selling space that’s uniquely apparel is slowly declining,” said Kerchival. “Health clubs, massage chains, seamstresses — things you can’t do online — are turning up in malls.”

Simon Properties’ Quakerbridge Mall didn’t have a food court, so the company turned selling space into fast food and restaurants such as The Cheesecake Factory. “Consumers are demanding more of that.” he said.

As department stores have consolidated, malls have found alternative anchors. In the beginning, it was movie theaters and entertainment-oriented retailers. Today, it’s venues that mirror customers’ interests, such as technology.

“Apple and Microsoft have grown their percentage of sales fairly significantly,” Perlmutter said. “You’ve seen much greater growth in food, with food becoming an anchor. We added an Eataly at The Shops at North Bridge on Michigan Avenue in Chicago. In terms of apparel, it’s been a little more stagnant. A certain percentage of the pie may be shrinking.”

At Simon, supermarkets and specialty food stores are being introduced at some malls. “We’re adding Fairway to the Nanuet Mall in Nanuet, N.Y., and Wegman’s to the Montgomery Mall in North Wales, Pa.,” said David Contis, president of Simon Malls, which is investing $1 billion on improvements and has 1.5 million square feet of active projects across 30 centers. That includes a hotel and residential units at Phipps Plaza in Atlanta, residential at Southdale Center in Edina, Minn., and a tower with condos and rental units at Copley Place.

“We’re upgrading the look and feel of our properties,” Contis said said. “Our properties are going higher end, with many adding luxury and new retailers, entertainment, including better restaurants, and focusing on customer amenities and service. At our best centers, it’s a reflection of the surrounding population, which has gained wealth, and shows the draw of great retail locations for tourists, too.”

“There are more spas, hair salons, blowout bars, restaurants and entertainment,” said Joseph Coradino, ceo of PREIT. “We’ve got to think of our properties experientially.”

That’s not the case everywhere. Garden State Plaza in March opened a new $160 million fashion district that combines all of the above. The 55,000-square-foot addition accommodates 23 retailers including Tory Burch, Vince Camuto, Maje, Sandro, Scotch & Soda, A|X Armani Exchange, Urban Outfitters and Microsoft. There’s also a Max Brenner Chocolate Bar and Starbucks. A new seating section features Knoll Carrara marble tables, Tom Dixon chairs, custom lighting and a concierge desk. A valet parking service was introduced to cater to shoppers of Neiman Marcus and the new fashion district.

At Broadway Plaza in Walnut Creek, Calif., Macerich is adding about 235,000 square feet (net) of new shop space to the existing 776,000 square feet, which is anchored by Nordstrom, Neiman’s and Macy’s. Macerich is re-creating this retail complex by demolishing about 80,000 square feet of existing space as well as two older, inefficient parking lots. The project will open in phases in 2015.

“New wings mean that you don’t have to walk through the whole mall,” said Kerchival. “You have a smaller area of just the shops you want.”

Some landlords are creating zones by aggregating high-end retailers. Sought after by landlords and looking for space are chains such as Lego, Athleta, H&M, Zara, Uniqlo and Topshop. The larger stores, which in the past opened units of 20,000 to 30,000 square feet, are finding that much space hard to come by today.

“I’ve seen smaller formats and a lot more flexibility to go into nontraditional sizes and spaces,” said Kerchival, adding that the days of retailers sending prototype plans to mall owners and asking them to “build it” are over.

“There’s a very dynamic dialogue going on between landlords and tenants about how much a landlord can charge and how much a tenant can afford,” Kerchival said. “Landlords and tenants both see a great opportunity in finding efficient distribution for consumer products and recalibrating their financial relationship in a mutually beneficial way.”

He noted that some retailers have began using stores as distribution centers for online sales to mitigate costs and increase productivity. It’s a model used by Macy’s and Wal-Mart. Westfield, Simon, General Growth and Macerich teamed up to found Deliv, a service that delivers items purchased in the mall to shoppers’ homes. “It’s the mall’s answer to Amazon,” he said.

Rents are also rising on key Manhattan streets, leaving some real estate experts to wonder when the bubble will burst.

“There’s no question that the prices have gone up,” said William Friedland, a principal in Friedland Properties, which owns buildings throughout Manhattan. “There was a huge backlog of real estate from the financial crisis” when retailers weren’t opening new stores. “The economy came back a bit in 2012. There’s extremely limited inventory now. That keeps prices high for those that want to come onto the avenue.”

“Rents continue to rise, and I find that troubling,” said Jeffrey C. Paisner, a broker at Ripco. “It’s getting to the point where it’s difficult for a store to do business profitably. You put a lot of pressure on tenants’ bottom lines. It’s happening in every major market and every major mall.”

According to the Real Estate Board of New York, asking rents for spring 2014 on Madison Avenue between 57th Street and 72nd Street rose 24 percent to $1,641 per square foot, while Fifth Avenue between 49th Street and 59th Street set a new record at $3,550 per square foot, an increase of 16 percent compared with spring 2013.

Jared Epstein, a principal of Aurora Capital Associates, said the acquisitions market is going after properties on the best streets, regardless of price. “Developers and investors have an insatiable appetite for high-street retail assets due to the demand from retailers to locate on these streets,” he said. “Retailers consider these locations a must-have for their brands due to their unparalleled foot traffic and superior visibility. The supply of properties left to be developed or repositioned on the best high streets has been greatly depleted over the past 12 months, and the supply of available retail space on these top shopping corridors is more scarce than ever before. These factors have driven up asset prices and retail rents. The economics have created an upward spiral with no sign of an expiration date. As rents increase, property values increase; as properties trade at higher valuations, the new owners need higher rents to satisfy their investors and their lenders.”

Epstein said today’s economic realities have forced retailers to be “more intelligent, sophisticated and efficient than ever before. They have proven their ability to elevate sales globally through strategically placed, heavily marketed and efficiently operated stores.

“New York City flagships are registering massive sales, generally the highest throughout a company’s entire fleet of stores throughout the world,” Epstein said. “When combined with the halo effect these stores have on a brand’s e-commerce platform, New York City stores become irreplaceable at nearly any rent.”

Joseph Sitt, ceo of Thor Equities, which owns 693 Fifth Avenue, between 54th and 55th Streets, among other properties, defended the rents, saying, “If an important retailer doesn’t have a presence in key locations like Fifth Avenue, the brand awareness will go to those that have a storefront.”

He cited Abercrombie & Fitch, which typically generates between $4 million and $6 million in its mall units. “Its Fifth Avenue store does $190 million in sales,” he said. “They can pay a higher percentage of sales because the volumes they’re doing are so high.

“There’s much more demand for the streets,” Sitt said. “Primarily Fifth Avenue and side streets in SoHo and downtown Brooklyn. There’s a lot of tenant demand for the Design District in Miami, but there’s not a lot of space. We’re having a hard time finding the product and the space and we’re finding creative ways to get vacancies.”

Andy Grasier, copresident and ceo of A&G Realty, which negotiates with landlords on behalf of tenants, said there were about 600 retail closings last year, but demand is so high, the problem of a lack of space hasn’t been alleviated. “Retailers have to look at landlords as customers and convince them why they should stay in their malls,” Grasier said. “They have to tell the owner what they’ll do to improve the center. Retailers have to sell themselves, which was never the case before. In the past, they just had to prove that they were credit-worthy.”

Coradino of PREIT said the number of international retailers entering the market is fueling competition. “You’ve had some attrition over the years, but supply has been constrained,” he said. He cited not only Uniqlo, Topshop, Zara and H&M, but Garage and Dynamite from Canada, and Cotton On from Australia as making inroads.

Topshop will open its fifth American store at Springfield Town Center in Springfield, Va., a center PREIT recently acquired. One of the few new malls opening up in the country, PREIT demolished the center and rebuilt it. The 1.4 million-square-foot mall is “a huge project, but we’ve already got some great tenants, J. Crew and Michael Kors and other great fashion brands,” Coradino said.

Expansion in the outlet arena can overshadow the growth of full-price retailers because it’s accelerating so quickly. About 5.4 million square feet of gross leasable space was added to existing outlet centers in the U.S. last year.

Nordstrom plans to sharply increase the number of Rack stores in the U.S. to 230 by 2016 from 148 currently, while Saks parent Hudson’s Bay Co. plans to double the size of Saks Off 5th over the next five years, opening about 70 stores to boost the count to 140.

The business is thriving outside the U.S., too, where McArthur Glen is building three new designer outlet malls and expanding eight in partnership with Simon Properties. In addition, McArthur Glen is building an outlet mall in Vancouver, in a joint venture with the Vancouver Airport Authority. “We really see a lot of demand,” said a spokeswoman, noting that new centers in Provence, France; Ghent, Belgium, and Remscheid, Germany, are in the works.

“We’ve become a shopping experience,” the spokeswoman said. “We have coffee shops and restaurants of all levels in each center. We have entertainment all year long and play areas for the kids. Our centers have become real destinations.

“We’re not looking into the U.S. right now,” she said. “We really built a brand here. There’s so much still to do in Europe. Germany is still underdeveloped. We don’t have anything in Spain. We’re also looking at Turkey — Istanbul is a very interesting market.”

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