As the mall industry’s cheerleader, it’s the job of Tom McGee, president of the International Council of Shopping Centers, to put a positive spin on less-than-encouraging trends. He seems to be able to find a silver lining in just about any difficult scenario.
This story first appeared in the May 22, 2017 issue of WWD. Subscribe Today.
“I continue to be very positive about the strength of the industry,” McGee said. “And I see the industry continuing to strengthen.”
McGee’s optimism remains even though a recent Credit Suisse report noted that in 2017 about 2,880 store closures have been announced, well over the 1,153 stores that closed by this time last year, and that the rate of closures thus far points to more than 8,640 closures by the end of the year. In contrast, 6,163 store were shuttered in 2008, the height of the Great Recession.
“For real estate developers, it’s a real opportunity to refresh the offering in the space,” McGee said. “It ends up being a very positive situation. They can attract tenants that are paying market rents. Department stores owned their property and were getting deals.”
Mall owners and operators are moving toward “more experiential retail,” McGee said, using the term that retailers and developers have bandied about for the last few years. He said sectors on the rise include specialty retail, manufacturers of consumer-branded goods opening their own stores, and more local retailers.
“There will be a lot more services in shopping centers,” he added. “The locations are attractive and the population around the malls is not decreasing, so there continues to be a need for the local community.”
Rather than blaming the Internet for driving the challenges facing retailers and shopping centers, McGee cited the fairly soft economic environment and demographic trends, including the fact that Baby Boomers have transitioned out of their prime shopping years; the small size of the next group in line, Gen X, and the inscrutable nature of Millennials, who retailers find hard to read.
“Baby Boomers 15 years ago comprised 29 percent of the U.S. population,” McGee said. “Gen X accounts for 19 percent. The enormous Millennial population is close to 29 percent.” Millennials’ values are different than other cohorts — they’re not as acquisitive, but they enjoy dining out, film and theater and health and fitness.
“Millennials have done everything later,” said McGee. “They bought homes later and got married later. They were heavily impacted by the recession. They’re now transitioning into their prime consumption years.” McGee noted that last month’s bump in home sales was driven by Millennials buying starter homes.
Melina Cordero, head of retail research in the Americas for CBRE, agreed. “The traditional mall models are not good for the consumer landscape of today,” she said. “At regional malls, 50 percent of the gross leasable space is given over to department stores and 58 percent of inline space is apparel. One of the first things we need to change is our dependence on these low-growth categories. That’s why so there’s much conversation about food and entertainment. We have to move toward growth categories with less e-commerce penetration. Give them something they can’t get online.”
“It used to be harder for entertainment and restaurant users, which have a higher risk profile and not as good a credit rating as department stores, to get leases,” said Mark Hunter, CBRE managing director. “Landlords are willing to accept a higher risk to better fill the needs of consumers. In a lot of cases, the landlord is providing a significant amount of capital for restaurants and entertainment tenants because the build-outs are more expensive.”
McGee cited recent data showing that 40 percent of the offering in shopping centers is not traditional retail, “it’s restaurants, services and health clubs,” he said. “As long as it’s good real estate, the owners and developers need to match up what’s in the community. There’s a transition in this country where 40 percent of space is still devoted to department stores, while in the rest of the world, it’s 20 percent.”
Just as the death of the movie industry was overstated several years ago, McGee believes malls are being written off prematurely. “I’m not overly concerned because the mall occupancy rate is 93 percent, a near-record high,” he said. “While there are store closures, there’s generally someone to take that space. We’re starting to see a lot of online retailers opening stores. What gets lost is that 2,000 store openings were announced. The reality is, if you look at the last quarter’s performance of major retail REITS, [real estate investment trusts] the earnings were very positive. It was overshadowed by iconic retailers announcing plans to close stores.
“Shopping centers need to match and curate their offer to meet the current demographic,” McGee said. “As Millennials become a bigger part of the buying pattern, the industry needs to catch up.”
While Millennials are known to prefer living in cities and using public transportation, Hunter said “as they get over deferring having kids, they’ll move to the suburbs because the public school systems in most urban markets aren’t that great. You’ll continue to see Millennials and younger people going to cities for jobs, but there will be success in suburban markets.”
Brad Sanders, who leads CBRE’s retail project management division, Skye Group, said there are discussions about access to malls and a decreased need for parking now that Uber is more in use. In new mixed-use projects, residents tend to use the mall during off-peak hours, just when the centers could use more traffic.
Sanders described a mall concept for a university town. “We took a fresh look at an 800,000-square-foot center. A department store will be divided into big boxes and a lifestyle component consisting of two student housing projects and a public transit rail line to the center,” he said, adding that such creative concepts are usually more expensive to build. “It was possible because the owner had financial wherewithal.”
McGee pointed out that two of the major consumer technology companies, Apple and Microsoft, have aggressively pursued physical retail strategies. “What they’re saying is that it’s hard to drive brand awareness and loyalty unless you have a retail presence,” he said.