macy's department store outdoor mall

The woes of department stores are starting to reverberate with landlords, some of whom see a dramatic reworking of retail space in the coming years.

“I firmly believe that even though [the U.S.] invented the shopping center concept, we have become obsolete in the merchandising of our big boxes,” said Sandeep Lakhmi Mathrani, chief executive officer of General Growth Properties, on a conference call with Wall Street on Jan. 31.

Mathrani said department stores, which currently make up 46 percent of gross leasable area in the U.S., would see their share drop by at least half.

Such a reckoning will eventually leave department stores with closer to 27 percent of the available space, which is the current rate in the U.K., Mathrani said. Although the process is expected to play out over the course of several years, the ceo expects GGP’s portfolio of department stores to go from 400 department stores to less than 300 in three to five years.

Mathrani pointed out that the approximately 8 billion square feet of retail property in the U.S. is “significantly more” than any other developed country, including France, Germany, the U.K., Australia and Thailand.

“Over time, I believe the oversupply in the U.S. will come down as lower-priority assets are repurchased or demolished,” he said.

The department store squeeze is well under way, with Macy’s Inc. and Sears Holding Corp. among the latest retailers to shutter stores.

But there are still believers. 

David Simon, chairman and ceo of Simon Property Group, which focuses “A” malls, offered Wall Street a more bullish take on the landscape.

“Now, it could be the time on the call where I could go into a lengthy philosophical discussion on the popular misconceptions about the mall business, created by the never-ending current public narratives,” he told analysts, who dialed in to go over the company’s fourth-quarter results. “And I could counter that by pointing that we have 434 department stores in our portfolio and only one is vacant. And how in the recently announced department store closing, we have only one closure in our portfolio or how we have added more than 275 sit-down or quick-service restaurants, more than 20 entertainment concepts and more than 80 big-box tenants across our portfolio over last four years, five years or we’ve added mixed-used components to our centers in the last several years.”

Simon pointed to his company’s $1 billion in reinvestment initiatives, fewer store closures and a 14 percent increase in gift card sales in 2016 as reason to believe mall traffic actually increased over the year. However, sales per square foot at Simon Property malls remained flat.

Simon acknowledged that, despite the group’s dedication to malls and glimmers of future prosperity, “the retail environment is not robust right now.”

And that’s especially true of the apparel world. To wit, grocery stores such as Whole Foods and Wegmans are among the big box tenants Simon is taking on.

GGP’s Mathrani also pointed to grocery as a likely candidate to fill much of the property to be left vacant by struggling department stores.

On the financial front, GGP counted $1.3 billion of net income for 2016, down from $1.37 billion the previous year, a drop it attributed to the sales and acquisitions of partial interests in two properties. Funds from operations for the year came in at $1.47 billion, up from $1.38 billion in 2015.

And Simon Property eked out $1.84 billion in net income for 2016, up slightly from $1.82 billion the year before, with funds from operations coming in at $3.79 billion for the year, compared with $3.57 billion in 2015.