If 2017 was retail’s annus horribilis, it may be shopping centers’ turn this year.
“While retail closures peaked in 2017, shopping centers will hit a peak in 2018 to 2019,” predicted Garrick Brown, vice president and Americas head of retail research at Cushman & Wakefield. “In the very immediate term, we’ll have 200 to 250 fewer malls. Class A centers will have total dominance of the marketplace.”
Greg Portell, lead partner in A.T. Kearney’s retail practice, estimated that among the 1,200 shopping centers in the U.S., one-third are antiquated and need to be repurposed or completely reimagined; one-third are in good locations, but need tweaks, and the last third were built for the modern shopper within the last decade, and are safeguarded from the pressures 2018 will bestow.
The continued migration of consumer spending to the Internet, Amazon’s online hegemony, and Millennials’ comparative indifference toward material goods contributed to bankruptcies and a retail reckoning that triggered a tsunami of store closures. Deborah Weinswig, managing director of Fung Global Retail & Technology, on Friday said store closure announcements in 2017 increased 229 percent to 6,985 units.
Brown sees store closings ramping up again this year, but said they likely won’t reach 2017 levels. “The Bon-Ton is looking at restructuring,” he said. “That doesn’t mean bankruptcy is imminent, but it usually does. I don’t know if anyone’s going to bail them out. J. Crew has a lot of leveraged buyout debt. If they happened to go into bankruptcy, a knight would probably save them. Vendors and factors are driving the closures.”
Since retail’s implosion in 2017, which caused brands such as BCBG Max Azria, The Limited, Wet Seal, Rue 21, True Religion and Cornerstone Apparel to disappear from shopping center floors, real estate investment trusts have been wary of apparel concepts. “Traditional apparel retail is where we’re seeing all the fallout,” said Adam Cummings, senior vice president leading CBRE’s national representation of mall retailers. “The lower-tier malls, the C and D centers, had the same retailers for years and they weren’t driving foot traffic.
“There’s a movement now by landlords to try to differentiate themselves,” Cummings added. “Overseas brands, homegrown retailers and online players that recognize the importance of a brick-and-mortar presence are opening stores.”
Malls’ move away from apparel follows demographic trends, said Greg Maloney, JLL’s chief executive officer of retail. “The Baby Boomers were a very apparel-driven society,” he said. “Malls’ gross leasable area was 30 percent to 50 percent related to women’s and men’s apparel and accessories. You’re seeing a complete shift in the other direction, to food.
“Gen X is at its peak spending power, but it’s the smallest cohort,” Maloney said. “As Millennials marry and have kids you’ll see children’s apparel growing because of the number of children being born. Right now we’re in a lull until 2021. Entertainment and food will dominate until 2021, when Millennial children reach their early teens. Millennials will start to look after themselves and apparel will come back into favor.”
There are fashion concepts that continue to expand, however. Duluth Trading Co., which celebrates the rugged style of tradespeople — think flannel shirts, cargo pants and fishermen’s sweaters — operates 30 stores and more are on the way. “They plan to open 30 to 40 stores in the next 18 months,” Brown said. “Adore Me is looking at stores and doing pop-ups first. There’s Marine Layer and Warby Parker. They all were pure-play e-commerce concepts a few years ago. They realize they do better when they have a physical store in conjunction with e-commerce.”
Weinswig painted the plight of traditional apparel retailers in stark terms, noting a “sustained splintering of spending away from generalists and middle-ground retailers. With so many choices available to them, shoppers will continue to favor more specialized retailers and channels.”
Internet pure plays are expected to capture an additional $43 billion in sales in 2018, and another $8.9 billion will be spent across the niche segments of apparel rental sites, beauty subscription services, online meal kits and apparel resale sites, Weinswig estimated. “In total, that peels an incremental $45 billion away from mainstream U.S. retailers,” she said, adding that the developments represent a societal shift away from middle-of-the-road retail behemoths, so don’t expect those sales to return.
Malls will continue to do their Darwinian thing, where the weakest players going to wherever dead malls go. “In the mall sector, there are the vital malls, and there’s everything else,” Brown said. “The weakest of the weak will go away. They’ll go into a debt spiral and get picked up by new owners. B malls will find new life as discount-oriented centers. The space from shuttered department stores will become T.J. Maxx, Marshalls and Home Goods stores.”
C and D malls will undertake “some really aggressive attempts at rebranding,” Brown forecast. “They’ll bring in nonconventional retailers like grocery stores or Costco. In the next five to seven years, a lot of quality operators will be undervalued.”
A recognition that REITs may be undervalued has already swung open the door to mergers and acquisitions, which are expected to escalate this year. “When you see companies that have mixed-use backgrounds merging with retail [REIT] entities, those combinations will be the best marriages of all because increasingly, malls will be about mixed-use,” Brown said, referring to French mall and office property investor Unibail-Rodamco’s $15.7 billion acquisition of Westfield last month.
Regency Centers Corp. in December closed on its $5 billion acquisition of Equity One Inc., a deal that created one of the largest shopping center investors in the U.S., with a market capitalization of $16 billion. But GGP has rejected the $14.8 billion buyout offer of Brookfield Property Group, one of the biggest owners and operators of U.S. shopping centers and GGP’s largest shareholder.
“I think we’ll also see REITs going private,” Brown said. “Running a development business from quarter to quarter is difficult. You need to take a longer-term approach to development. Rouse was one of the first REITs to go private. They’re doing all sorts of things that they wouldn’t have been able to do if they were public because their stock would take a beating. Some of the smaller REITs are probably prime targets.”
Landlords have to adjust their expectations when it comes to tenants. “Landlords have always been driven by credit tenants and long-term lease guarantees,” said Melina Cordero, CBRE Americas head of retail research. “They’re now dedicating space and investing in up-and-coming retailers, and giving them more flexible lease options. If an anchor tenant is closing, they might offer to buy back the space.”
Top REITs have been converting space recaptured from struggling department stores such as Sears and J.C. Penney into offices, housing and hotels, creating captive audiences to provide a traffic lift to their properties. Developers also have begun looking at innovative ways to use excess parking lot space — fewer visitors means fewer cars — by converting some of it to office buildings or off-the-mall restaurants.
The incredible shrinking shopping center may be coming to a community near you. “Our occupancies are at an all-time high with vacancies of 4.2 percent,” said JLL’s Maloney. “Rents are stable and growing. When you see rents going the other way, it’s usually a C center. A lot of those properties have gone by the wayside. There will be more malls closing or malls being repurposed into something else. If a shopping center had 500,000 square feet of retail, it will be downsized to 200,000 square feet of retail plus the addition of offices and residential.”
Portell said landlords have to adjust to the fact that they’re no longer dealing only with brands such as Gap and American Eagle, whose sophisticated in-house real estate departments make managing 1,000 leases easy. “The mom-and-pop model is a different type of lessee,” he said.
“American Express realized that it had an issue in attracting small businesses to use its card, so it built an entire service capability that supports small retailers that found dealing with Amex too hard,” Portell said. “Malls can be more helpful with the daunting aspects of entering shopping centers for small retailers.”
Retailers and shopping centers emboldened by solid holiday results would be mistaken in thinking that consumers want business to continue as usual. “Consumers are tired of how retailers are showing them products,” Maloney said. “They want something more exciting and cutting-edge. They want choices and want to be engaged. They don’t want to browse through a store the way Baby Boomers do.
“The experience is always going to drive shopping,” Maloney said. “Shopping can be entertaining. That’s why the shopping experience is changing.”