Owning shopping centers is not a short-term business and has never been. Yet those outside the industry tend to take a myopic approach when analyzing the impact of occurrences like the loss of an anchor store. An anchor store closure must mean the mall is dying, right? Not so fast. The real impact of these closures is much more different than you might assume.
Throughout the first quarter of the year, mall stalwarts J.C. Penney, Macy’s and Sears all made headlines as they announced plans to shutter hundreds of stores nationwide, but store closures are not a new phenomenon. In fact, the act of pruning store count in the beginning of the year is common practice in retail. According to data from PNC Real Estate and ICSC Research, approximately 50 percent of announced store closures each year occur during the first quarter.
That said, anchor stores have historically held more weight in terms of prominence — and square footage, for that matter — so it is understandable that the spotlight shines a little brighter when these announcements are made. In many instances however, the relationship between losing an anchor store and the health of the property in which it resides is not direct. What gets lost among the onslaught of negative headlines is the tremendous opportunity to reinvent the center by bringing in new uses — and ultimately drive new revenue.
Since the inception of malls, and during the construction boom of the Seventies and Eighties, anchor stores played a significantly different role than they do today. Pre-Amazon and online shopping, anchor stores were the known commodity at the mall — drawing traffic to the center which, in turn, allowed customers to “discover” the small shops.
Nowadays, while over 90 percent of sales occur in-store (yes, you read that right), many of these sales are initiated online. As a result, customers are far more educated than in the pre-Internet era, which makes their approach to shopping more targeted. To some degree, the “discovery” now happens digitally, allowing any tenant to be the “anchor” that draws a customer to the property. Once the customer finds the item they want online, they head to the nearest store to buy it — and typically leave having spent an average of 13 percent more than they initially intended, according to a recent Harvard Business Review study.
This does not mean that traditional anchors are obsolete — but they cannot stay the same. There is little doubt that there has been some short-term pain in this category as retailers adjust to new customer behaviors and demands. However, savvy retailers that embrace this challenge will remain highly productive and profitable tenants.
Though many are seemingly fearful of the challenges that a shuttered anchor store may present — I see opportunity. At CBL, we recently acquired five Sears locations at our centers for future redevelopment through a sale-leaseback transaction. While Sears will continue to operate these stores in the near-term, we now have the opportunity to redevelop 20 to 30 acres of prime real estate at some of our best centers. Not only are we able to recapture this space, but it puts us in control of the timing of these store closures as we finalize redevelopment plans — all the while generating income for CBL.
We are confident that these projects will be a success because we’ve done it before. In late 2013, we proactively purchased the Sears location at our CoolSprings Galleria, a 1.1-million-square-foot super-regional center located in a growing and affluent area of Nashville, Tenn. We knew we wanted to do something truly transformative — bringing in a mix of retail, entertainment and dining that would underscore the center’s dominant position in the market and set it apart from the ordinary.
Roughly 18 months later, we celebrated the grand opening of the redeveloped center, which featured a number of new-to-the-market users like American Girl — one of only 20 in the country, and King’s Bowl — a unique restaurant, bar and entertainment operator, as well as dining experiences such as Cheesecake Factory, Connors Steak and Seafood, and Kona Grill. The results did not disappoint. Following the opening, the entire center experienced an 18% increase in sales per square foot — proof positive that we had achieved our goals.
These redevelopment projects are not only transformative for the center, they are also profitable for the owner. One point that is often overlooked is that the majority of anchor stores are owned by the retailer, not the mall. While an anchor may be paying some nominal Common Area Maintenance charge, they may not be paying rent. Once a redevelopment is completed, the mall owner can benefit from significantly higher income as well as add value to the property.
That’s why, when Macy’s announced its latest round of store closings in January, we decided to buy three locations in our portfolio. This allows us to take underperforming space and convert it into new retail, dining, entertainment, or other uses. The benefits of doing this? Obviously, the first is that it will increase excitement, traffic, and sales at the property. The second is we now have the opportunity to drive increased revenue for CBL from this space.
CBL is not alone in capitalizing on the opportunities that anchor store rationalization presents. In January, PREIT announced it would buy back three Sears locations and last year GGP bought five Macy’s in its portfolio.
Just like the project at CoolSprings Galleria, we’ve had tremendous success with our anchor redevelopment program over the past three years. On average these projects take 12 to 24 months to complete and require an average investment of about $10 million dollars. It’s a small price to pay when you consider our average pro forma return is between 8 to 10 percent. I understand the natural reaction is to worry when these stories break, but as someone who has grown up in this business and witnessed the many renaissance periods our industry has endured, I see this as an extraordinary opportunity to reinvest in and strengthen our core assets.
Stephen Lebovitz is president and chief executive officer of CBL Properties.