Retail Traffic
By Elaine MisonzhnikThe enclosed regional mall—the uniquely American retail property that sprang to life in the 1950s and 1960s—has been declared dead (or dying) for years.
Stephen D. Lebovitz, president and CEO of CBL & Associates Properties Inc., a Chattanooga, Tenn.-based regional mall REIT with an 82.1-million-square-foot portfolio, recalls conversations with tenants in the not-so-distant past in which retailers insisted their future lay elsewhere—at lifestyle centers or town centers or mixed-use projects. The experience was not limited to CBL—mall executives across the board were having similar discussions with their tenants. At the time, many believed the format had outgrown its usefulness and was out of step with modern customers. “A lot of the retailers went so far as to say they prefer lifestyle centers over regional malls,” Lebovitz says.
The list of grievances was long.
Malls were too large.
Their temperature-controlled environments were too artificial.
Department stores—the original conceit around which the concept was developed—were not the draws they once were.
Mall parking lots were too sprawling and mall parking garages too arduous to navigate.
Formats like power centers, lifestyle centers and mixed-use facilities were newer, hipper and more convenient.
And, of course, there was the constant growth of internet retail, which continues to slowly eat away at traditional retail channels.
In response to these factors, mall owners were pressured to adapt and change. Many constructed lifestyle center add-ons to existing malls or explored how to make properties mixed-use. Others redeveloped dated centers to make them fresher and brought in the best elements from other retail concepts. In addition, firms stopped building new regional malls entirely. (In fact, 2011 will mark the fifth anniversary of the last ground-up enclosed regional mall in the country.)
“The regional mall has been going out of style for 30 years,” says Richard S. Sokolov, president and COO of Simon Property Group, the Indianapolis-based REIT with the largest regional mall portfolio in the country. “If you just Google ‘The regional mall is dying,’ you’ll come up with hundreds of articles.”
But a funny thing happened over the past three years.
As the Great Recession unfolded, regional malls—rather than being pushed to the brink—weathered the storm better than any of their supposed replacements. The very things that made fortress malls seem so outdated—their size, their enclosed environments, their dependence on anchors—proved to be powerful assets instead.
Quarter after quarter, U.S. regional mall REITs have outperformed shopping center REITs, beating analyst estimates and occasionally posting NOI growth. By 2010, class-A regional malls shot up to the top of both retailers’ and real estate investors’ list of preferred product types.
After bottoming in December 2008, seasonally-adjusted sales-per-square-foot figures at malls have been increasing, according to ICSC Research. The monthly average for 2010 was $386.43 per foot—a nearly $20 per square foot increase from the previous year (although shy of the $415.71 per square figure posted in 2007). Overall, national mall sales rose by 4.6 percent in 2010 over 2009—the best performance for the sector since 2006.
Malls took some cuts in occupancy rates, but not nearly as much as other sectors. From the first quarter of 2008 through the first quarter of 2011, regional malls experienced a vacancy increase of 210 basis points, according to the CoStar Group, a Washington, D.C.-based research firm. Over the same period, the vacancy rate surged 260 basis points for lifestyle centers and 240 basis points for neighborhood shopping centers. During those years, rents at regional malls fell $0.95 per square foot, less than at any other retail property type, in CoStar’s estimates. Lifestyle centers suffered the greatest fall in rents—a staggering $7.38-per-square-foot.
“The regional mall has never been more vibrant than it is today,” Sokolov says. “It’s an extremely efficient channel of retail distribution. The performance of regional malls has been very consistent, very stable, and as we enter a period of economic growth, the malls are very well positioned to take advantage of it.”
Indeed, the very tenants that talked of severing ties with enclosed regional malls a few years ago are returning to the bargaining table. Moreover, some retailers that always favored power and lifestyle centers in the past are now coming around as well, says Lebovitz. “Over the course of the recession, foot traffic fell at lifestyle centers and the sales targets did not meet their original expectations,” he says. “And a lot of those retailers have now come back to the mall as their preferred type of real estate.”
Regional mall owners have recently started to sign leases with Dick’s Sporting Goods, Bed Bath & Beyond and The Container Store, in addition to negotiating deals with supermarket operators, warehouse clubs and discounters.
“The verdict is malls are very much alive,” says Joseph F. Coradino, president of PREIT Services LLC, a Philadelphia-based REIT which operates both malls and power centers. “The retail tenants that have begun to expand are increasing their occupancy in malls, [including] some of the new concepts. Even Burlington Coat Factory and Toys ‘R’ Us are now opening pop-up stores in malls.”
To be sure, challenges remain. There continue to be wide disparities between top-tier malls and lower grade assets. Many mall owners are exploring offloading the lowest quality assets in their portfolios. And there is little, if any, room for new enclosed regional mall development.
Instead, what’s likely to emerge over the next several years is a retail landscape with somewhat fewer regional malls than exist today. The malls that will remain, however, will not be dying beasts. Instead, these survivors will continue to be retail stars and the centers of their respective markets.
Forces of nature
So how to account for the mall’s comeback?
An important point that many retail industry insiders forgot during the boom years was that malls became a hugely popular retail concept for a reason. The developers that created the country’s first regional malls picked their sites based on strong demographics and wide trade area pulls, says Chris Macke, senior real estate strategist with CoStar. Because of their size, malls have been able to assemble a broader selection of retailers in one place than any other retail format, better positioning them to fend off competition from the Internet.
“It’s about having great real estate, a great location and critical mass—at least 500,000 square feet of space, and great retailers,” says Michael P. Glimcher, chairman of the board with Glimcher Realty Trust, a Columbus, Ohio-based regional mall REIT with a 21.6-million-square-foot portfolio.
An example of this approach is Taubman Centers-owned The Mall at Short Hills in Short Hills, N.J. The 1.34-million-square-foot property boasts five functioning department store anchors in Macy’s, Bloomingdale’s, Nordstrom, Neiman Marcus and Saks Fifth Avenue and features 42 retailers that can’t be found anywhere else in New Jersey. Even today, tenants wanting to get into that center often have to wait until a spot becomes available, notes Jeff Green, president of Jeff Green Partners, a Phoenix, Ariz.-based real estate consulting firm.
The success of the mall has largely been a function of its positioning in a densely populated area with high household incomes, says William S. Taubman, COO of Taubman Centers, a Bloomfield Hills, Mich.-based regional mall REIT with a 24.7-million-square-foot portfolio. When Prudential Insurance Co. started developing Short Hills in the 1950s, many of its customers in the surrounding community were wealthy Prudential executives. Most or all of the retailers that went into the center already operated stores on Fifth Avenue in Manhattan. After Taubman entered the picture in the mid 1970s, it expanded the department store line up to the five major brands, further strengthening the mall’s appeal.
Malls were also meant to be more than just shopping venues—when Austrian-born architect Victor Gruen designed Southdale Center, the world’s first enclosed regional mall in Edina, Minn. in 1956, he envisioned the property as the center of its community, a place where people would socialize and hold public events. Over the years, the mall, with its temperature-controlled environment, its public plazas and its movie theaters, has evolved as a reliable hangout spot for teenagers and a place where adults could go to do some people-watching and de-stress.
In a lifestyle, power or grocery-anchored shopping center, a shopper typically heads to one store, buys whatever he or she needs and heads back to the car, Macke notes. An enclosed regional mall is the kind of venue where the shopper can spend an entire day, wandering from one store to another.
Take the Galleria at Sunset, a 1.1-million-square-foot mall in Henderson, Nev. owned by Forest City Enterprises, a Cleveland, Ohio-based retail owner. The temperature in Henderson in the summer often reaches well above 100 degrees, says Alan Schmiedicker, senior vice president of property management with the firm. People won’t shop too long in an open-air center in that kind of heat. But because the Galleria at Sunset offers an air-conditioned environment, customers view it as a place of respite, as well as a shopping mecca.
“I think that the typical good regional mall is an entertainment destination,” says Rich Moore, a REIT analyst with RBC Capital Markets. “Most [other] centers are there to just get the product to you. I think the regional mall is really the place where you can stroll the property, see lots of different retailers, look at people, find a place to eat, maybe go to the movies.”
What’s more, the two segments of the retailing world that have experienced the greatest comeback in the past two years have been luxury and value chains. Luxury retailers’ expansion strategy has always been to go into stores on high traffic urban streets and into upscale regional malls, says Matt Winn, managing director of retail consulting with Cushman & Wakefield, a commercial real estate services firm.
Meanwhile, some of the value players that have previously had a limited presence at malls, including department store Kohl’s, fast fashion retailer H&M, warehouse club Costco and discounter Target, have started signing more deals at mall properties. About two years ago, for example, Kohl’s signed a deal at the Galleria at Sunset. Last fall, Target opened a 150,000-square-foot store at Simon’s South Shore Plaza in Braintree, Mass., serving as an anchor alongside Nordstrom.
In the months immediately following the onset of the recession, foot traffic at malls did experience a precipitous drop, says Bill Martin, co-founder of ShopperTrak, a Chicago-based research firm. Over the past year or two, however, traffic at enclosed regional malls has stabilized. Some of the customers on the lower end of the income spectrum have been trying to do more of their shopping at discount stores, but the habits of the high income consumers have been less affected, Martin notes.
“Obviously in the Great Recession, there was a greater focus on price and the regional mall is not the warehouse, it’s not the cheapest venue for the delivery of goods,” says Taubman. “On the other hand, the mall’s great strength is that it provides a social experience and continues to be the most important way to sell fashion merchandise in America. It’s a very flexible venue that can change its merchandising strategies to meet the needs of the market.”
Malls suffered some setbacks tied to department store bankruptcies in 2008 and 2009, including liquidations of Mervyn’s and Gottschalks. In 1990, the department stores’ share of the U.S. retail market totaled more than 7 percent, according to a study compiled by Customer Growth Partners, a New Canaan, Conn.-based retail consulting firm. It has since dwindled to the low single digits. In 2010, however, the department stores’ share of the market rose to 2.5 percent. It was the sector’s first increase in market share since 1980.
Meanwhile, many of the sector’s remaining mainstays have been posting improving fundamentals. In fiscal year 2010, department stores as a group posted a same-store sales increase of 4.1 percent, according to ICSC, above the 3.5 percent figure for all ICSC-tracked retail chains. In the first four months of 2011, their year over year same-store sales growth has averaged 2.7 percent per month.
Even when department stores leave, their boxes can often be repositioned to draw in regular foot traffic, notes Glimcher. At some centers, Glimcher has been using former anchor spaces to bring in a wide selection of restaurants. At others, the firm has brought in big-box retailers.
Finally, the fact that most of the class-A and class-B regional malls in the country today are controlled by publicly traded REITs with decades of experience and easy access to capital could also have been a factor in the format’s resilience, notes Moore. Many of the lifestyle centers built in the early and mid-2000s were run by private players who didn’t necessarily have a good grasp of the retail game. They also rarely had the clean balance sheets and recapitalization opportunities available to the REITs, adds Glimcher.
“I think it’s a testimony to how good the REIT operators are,” Moore says. “The lifestyle center came after the regional mall and in many places, there was often a regional mall nearby, so there was always a tug of war between the existing center and the new guy on the block. And in most cases, a good regional mall is still a dominant asset in the market.”
Tenant sales per square foot for the four mall REITs covered by Morningstar, a Chicago-based research firm, including Simon, General Growth Properties, Macerich Co. and Taubman Centers, posted increases ranging from 6.4 percent to 12.4 percent over the past 12 months. In the case of Taubman, tenant sales are now 1.6 percent above the peak reported in 2007. Simon’s tenant sales are only 0.2 percent below their 2007 peak.
As a result, Todd Lukasik, a REIT analyst with Morningstar, expects that occupancy at regional mall properties will continue to improve in 2011, and will help shore up rental rates.
In the first quarter, vacancy at regional malls reached 9.1 percent, according to Reis Inc., a New York City-based research firm. The figure is 400 basis points above the cycle low recorded in the second quarter of 2005, at 5.1 percent, and 40 basis points higher than the rate recorded in the fourth quarter.
The decline—a hiccup in the mall’s recovery rather than a harbinger of a long-term trend—could be attributed to an echo effect from anchor vacancies that afflicted the regional mall sector in 2009 and early 2010, Reis researchers explain. As some anchors exited malls, a few in-line tenants have followed suit.
Yet the vacancy rate for regional malls is still lower than the rate for neighborhood and community shopping centers, which stands at 10.9 percent. Many analysts expected neighborhood and community shopping centers to outperform other property types during the Great Recession because they rely on necessity-based shopping. But those centers also feature a significant number of local and regional retailers, which were at greater risk of failure during the credit crunch than the national credit-rated tenants regional malls rely on, notes Simon’s Sokolov.
“The vast majority of our tenants are very credit-worthy and to the extent that they had obligations on their leases, they had to honor them and they did,” he says. “Compare that to the community centers, which had a [greater] reliance on local retailers. Those tenants were less capable of withstanding the economic shock.”
Challenges remain
That’s not to say that owners of enclosed regional malls can sit back in smug satisfaction. Those who run class-A and class-B malls will have to continually refresh their properties to keep them relevant to the consumer with the most popular retailers and plenty of entertainment options, says Moore.
There are plenty of class-B- and lower assets around the country that might never regain their footing, notes Winn. Unless those properties can once again become the dominant retail centers in their trade areas, an extremely hard feat to achieve, according to Sokolov, they will eventually have to be razed or redeveloped into other uses.
“The question is what happens to malls anchored by tenants who have not fared well?” Winn asks. “There is still some evolution going on and I am not sure how it will shake out. It’s really dependent on what happens with the retail brands themselves. That’s one of the lessons from the past decade: people come into the mall for the retail brands, not for the brand of the mall owner.”
Out of the 1,437 regional and super-regional malls in the country today (according to ICSC’s figures), the top 700 or 800 properties are here to stay, ventures Anthony Cafaro Jr., co-president of the Cafaro, Co., a Youngstown, Ohio-based privately held mall owner with a 30-million-square-foot portfolio. The bottom 25 percent of malls, however, may have to go. “There will be many cities that maybe won’t have a mall, or won’t have as many malls,” Cafaro says.
The best way to look at the situation is to follow the most successful mall-based retailers, like Victoria’s Secret and Bath & Body Works, he adds. Once those retailers have filled out the top 700 or so malls, they stop expanding within the format and the productivity of the remaining assets drops precipitously.
“You are seeing a lot of REITs looking to sell what they call ‘non-core’ properties’—in a lot of cases, they are non-performing properties,” Cafaro notes. Indeed, Simon, General Growth and Australia-based mall operator Westfield Group are reportedly looking to dispose of about 40 regional malls collectively.
In some cases, what’s happened is that owners haven’t been able to invest enough capital in the properties because they lost several anchors during the recession and couldn’t replace them, notes Todd Caruso, senior managing director and leader of the retail agency practice with CB Richard Ellis.
Some of those assets can be saved if they get repositioned to better serve the current needs of their market. For example, in areas where the average household income has dropped, mall owners might be able to regain market share by bringing in value-oriented stores like Kohl’s to replace a mid-income or upscale department store anchor. In other instances, however, the options for owners of the underperforming assets will be limited.
“I think over the next few decades the stronger malls are going to continue to grow and the weaker malls are going to lose market share,” Sokolov says. “That’s why we are so focused on renovating our properties and making sure they are well-leased and well-marketed.”
In fact, the emerging strategy of adding on non-retail components such as medical offices, schools and government buildings to regional malls might be particularly well-suited to lower grade assets as they will likely struggle to regain national tenants, says PREIT’s Coradino. In those cases, a combination of alternative space users with local store operators might be the best hope of keeping the property operating.
New partnerships
In the meanwhile, regional mall owners are aiming to take advantage of current market conditions to siphon off tenants from competing property types. Over the past 12 months, tenants that have traditionally gravitated toward freestanding stores or locations in power centers, lifestyle centers and grocery-anchored shopping centers have started signing leases at enclosed regional malls.
If the trend spreads, it should help the regional malls stay competitive by supplying them with extra foot traffic and establishing them as the dominant shopping destinations for their trade areas, says Macke.
This coming October, for example, CBL & Associates will welcome a 46,500-square-foot Dick’s Sporting Goods store to its Layton Hills Mall in Layton, Utah. The retailer will take over a space vacated by Mervyn’s in December 2008. Bed Bath & Beyond is currently hiring employees for its soon-to-come store at General Growth Properties-owned Rogue Valley Mall in Medford, Ore. Simon expects to open a 23,000-square-foot Container Store at its SouthPark mall in Charlotte, N.C. in the fall. Over the past two years, Forest City has brought in Kohl’s to the Galleria at Sunset and the South Bay Galleria, a 959,247-square-foot mall in Redondo Beach, Calif. Previously, Kohl’s gravitated toward freestanding units.
“Both mall owners and Kohl’s saw the opportunity that shoppers were looking for more convenience and fewer shopping trips,” says Schmiedicker. “Now you don’t have to go to a strip center or a power center down the road. You are able to go to one place and get it all done.”
Dick’s Sporting Goods has been among the most frequently mentioned newcomers to enclosed regional malls. Virtually every major mall owner Retail Traffic spoke to says that it has either signed leases with the chain or is currently in negotiations for new deals. The retailer operates stores that average 50,000 square feet and signs leases for a term of 10 to 25 years, with multiple five-year renewal options.
Bed Bath & Beyond is another fresh addition to mall rosters. The retailer operates stores that range between 20,000 and 50,000 square feet, with lease terms that start at 10 years. Mall owners are also increasingly bringing in discounter Target, electronics category killer Best Buy, furniture seller Crate & Barrel and The Container Store.
In addition, executives with Simon, CBL and General Growth all say they are in negotiations with supermarket operators like Whole Foods and Fresh Markets to open locations at regional malls.
“Shopping in a mall should be the focal point for the social activity of the community the mall serves and I think one of the biggest challenges is to start working with non-traditional retail uses,” says Alan Barocas, senior executive vice president of leasing with General Growth Properties, a Chicago-based regional mall REIT with a 164-million-square-foot U.S. portfolio. “In the past, we would not look at a supermarket like Whole Foods as an acceptable anchor. But today, it serves the market and brings in a lot of foot traffic.”
Most of these retailers have historically preferred freestanding locations or locations in strip and power centers, but a unique combination of market forces had made this an opportune time for them to expand into regional malls, according to Jeff Green.
For one thing, there is space to be filled. Previously there were few opportunities for large space users to build up presences at malls. Now, the market has plenty of empty department stores to accommodate their needs, says Anthony Cafaro Jr. It’s also made the idea of bringing in power center and lifestyle center tenants more palatable to mall managers and landlords.
Power center tenants, meanwhile, have been concentrating on shrinking their average store sizes, a trend that has made it more challenging for them to find appropriate size boxes at more traditional locations, says Gerry Mason, executive managing director with the New York City office of Savills, a real estate services provider.
Prior to the recession, Dick’s Sporting Goods would often open stores as large as 70,000 square feet. But in the current climate, most tenants prefer going smaller and enclosed regional malls offer a greater range of store sizes for them to choose from.
As for the regional mall owners, bringing in stores normally associated with other retail formats helps them fight off competition from neighboring lifestyle and power centers, says Sokolov.
In the past, “the mall just didn’t have the square footage to accommodate those users,” he says. “But as there was an increasing number of department store boxes that ceased to be, that opened up a new opportunity. Then, as those tenants opened in the malls, they found their stores were productive and that encouraged them to pursue more opportunities.”
Development outlook
Despite the sector’s performance, don’t expect to see much new development. Even prior to the current downturn, the U.S. mall market was near the point of saturation. During the 1970s, the heyday of the mall, U.S. developers delivered a total of 375 million square feet of new space. By contrast, in the 2000s, new mall deliveries fell 62 percent, to 144 million square feet, according to research from CoStar. Overall, regional malls account for 16.9 percent of all retail space today, down from a share of 22.9 percent in 1982.
While there might still be pockets of high-growth areas that might support a new regional or superregional mall in the future, any new mall projects will be approached with a great deal of caution, says Moore. To justify building a 1-million-square-foot (or greater) property, mall developers need a market with $250 million to $350 million in disposable income, notes Sokolov, and there are not many such sites left. Taubman estimates that over the next 10 years, U.S. developers might build about 15 to 20 new malls. “I am a developer, so I am an optimist,” Taubman says. “There is growth in this country, we will be adding millions of people over the next 40 years and they are going to need somewhere to shop.”
Still, Moore expects a net decrease in the number of malls in the U.S. over the coming decade, as the industry redevelops or razes assets that prove to be unviable. Most mall owners are instead concentrating on redevelopment and renovation.
To capitalize on consumer’s current preferences, they have been bringing in more full-service restaurants, movie theaters and other entertainment venues to their properties, as well as trying to maintain the malls’ physical appeal. Simon, for example, has been working with Merlin Entertainments Group to bring in Legoland Discovery Centers and Sea Life Aquariums to its malls. The REIT plans to spend approximately $500 million on mall redevelopment projects this year, and a similar amount or greater in 2012.
Forest City has been expanding play areas within its centers to make shopping easier for customers with kids. CBL has signed deals with more than 20 new restaurants over the past 12 months, according to Lebovitz.
“We are concentrating less on opening new centers and spending more effort and capital on improving existing assets,” says General Growth’s Barocas. “In some cases, it might be a total remodel, in some cases it might be an expansion. And in some cases, based on the market, there could also be a reduction.”
After Westfield completed the redevelopment of its 1-million-square-foot Westfield Culver City in Culver City, Calif., in November 2009, tenant sales at the property experienced double digit percentage increases, according to a spokesperson for the firm. The $180 million redevelopment included a line-up of full-service restaurants and a 330,000-square-foot expansion. Target and Best Buy took over empty department store space at the property. H&M, XXI Forever, Coach, Disney and Gold’s Express Gym were some of the other newcomers to the center.
Some owners have also started exploring bringing in non-retail uses such as health care and education facilities to the peripheries of their malls, to drive additional foot traffic. “I think the traditional four-anchor regional mall will disappear,” says Moore. “And the mall will cater instead to the trendy, interesting things the consumers want to do.”
That means that over the coming years the regional mall will largely retain its physical shape, but the collection of tenants within its walls will become a hybrid of the most successful components of all retail property types. In addition to visiting Victoria’s Secret and the Gap and spending an hour or two at the multiplex, mall shoppers will be able to dine at a full-service restaurant, entertain their kids at a bowling alley, browse house wares at a big-box store and do their grocery-shopping in the course of a single trip under one roof.
“I think our industry is an industry that hasn’t really changed in a long time in terms of thinking through the mall model and this economy has forced us to be creative,” says Coradino.
