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Tuesday, 09 January 2018

The U.S. Shopping Mall - A Dying Breed?

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Commercial Real Estate Direct Staff Report

If you've paid attention to recent headlines, you might think the mall is dying, if not dead already. Once a post-war mecca to suburban sprawl, the enclosed mall has seen its share of distress over the past few years.

As technology and changing consumer preferences have transformed the retail landscape, the mall has faced challenges. Anchor retailers like Macy's, Sears and JCPenney have dragged the mall as a category down with them. Some malls are not going to survive. Of the roughly 1,100 enclosed malls in the United States, up to 25 percent could close by 2021, according to a projection by Credit Suisse.

However, some malls are thriving.

Simon Property Group just completed an expansion of the King of Prussia Mall in suburban Philadelphia that added 155,000 square feet to the already mammoth property, making it the largest in the U.S. The mall's inline stores generate an estimated $975/sf in annual sales, which also makes it among the country's most successful properties, according to estimates by Green Street Advisors. It pegs Bal Harbour Shops in Bal Harbour, Fla., with an impressive $3,185/sf in sales, as the most successful in the country - and it doesn't even have an Apple store. The 450,000-sf property is owned by Whitman Family Development of Miami.

The number of shopping malls in the country increased five-fold, to 1,500, between 1970 and 2012, according to the International Council of Shopping Centers. Space dedicated to retail has grown by 400 percent since 1970, while the U.S. population has increased by only 50 percent, according to GGP Inc.

The U.S. has 23.5 sf of retail space per person, the most for any country, according to Morningstar Credit Ratings. That compares with 16.4 sf in Canada and 11.1 sf in Australia.

The enclosed mall was born of post-war expansion (see centerfold). Rapid suburban sprawl created the need for a place for people to congregate and shop. Favorable tax laws encouraged development and a growing interstate system provided the means for consumers to travel.

With money in their pockets and optimism in their hearts, consumers welcomed this new form of retail property with open arms. Malls also thrived because they faced little competition. Neighborhoods that sprang up out of former farm land did not, by and large, have central shopping districts.

But times have changed. The same phenomenon that helped create the mall - large-scale shifting consumer demographics - is what's responsible for challenging its existence today. While the Greatest Generation moved to the suburbs, Millennials are moving back to the cities and e-commerce has redefined how consumers shop.

But consumers are still shopping. Online spending last Black Friday, traditionally the busiest day for retailers, was a record $5.03 billion, up 16.9 percent over the previous year, according to Adobe Systems Inc. However, traffic in brick-and-mortar stores this past Black Friday was down 4 to 6 percent, according to an estimate by Cowen & Co.

So, it's no surprise that some traditional retailers are drowning. Apparel, a category that long was thought to be immune from e-commerce competitors, and shoe stores led the pack of store closures in 2017 with 1,483 in total, according to research from JLL. However, other retailers are thriving. JLL reports that 1,650 dollar stores opened last year.

What Makes A "Good Mall?"

Which qualities ensure a mall will survive and which are precursors to its demise? According to mall pioneer and developer Alfred Taubman, who died two years ago, it all comes down to design. A well-designed mall will break down the barriers between the customer and the merchandise, which he called "threshold resistance." The six pillars of smart design are convenience, a diverse mix of tenants, the feeling of luxury, differentiation, entertainment and comfort.

But smart design two decades ago might not be smart design today. Mall owners need to adapt to changing consumer preferences in order to stay relevant. The life expectancy of a mall is about 25 to 30 years, according to Ellen Dunham-Jones, author of "Retrofitting Suburbia" and a professor of architecture at the Georgia Institute of Technology. Mall construction reached its peak in the 1990s with the opening of 19 malls in the U.S., so it's no surprise that we're in a period of attrition.

Change requires capital. That puts the best-capitalized mall REITs at a point of advantage. They typically have better access to capital than other owners.

For instance, GGP invested about $700 million on renovations last year. In last year's third quarter, it had reported a 2.1 percent increase in inline store sales from the year before.

Taubman Centers, another owner of top-tier malls, has developed, renovated or expanded more than 75 percent of its properties since 2008. Inline sales for the firm climbed by 2.8 percent from a year earlier.

And Simon is retooling its tenant mix. Leases devoted to apparel retailers last year were down about 20 percent, and the percentage of leases signed with retailers devoted to food and entertainment was up about 20 percent. The Indianapolis company also has a team dedicated to up-and-coming retailers that may have started with digital-only platforms, but might be interested in expanding to physical stores. Many of these retailers, like Bonobos, open mall stores that function as showrooms, so they require smaller footprints than traditional retailers.

Macerich Co. is also eying digital retailers, and has put together a list of more than 400 that could be candidates for space at its malls. To entice them, it's considering flexible short-term leases.

GGP, meanwhile, is looking to revamp some of its malls, effectively turning them into mixed-use properties. It added the Park Lane at Ala Moana residential condominiums to its Ala Moana Center in Honolulu. Open since April, the project is 95 percent sold. It's also signed an agreement with AvalonBay Communities to develop a residential component to a GGP retail center in Seattle.

As willing as they are to upgrade and evolve profitable malls, the top mall REITs are equally willing to let go of underperforming ones. So, ownership is a function of profitability as much as it is a product of it.

Struggling Malls Cannot Find Their Way

Meanwhile, it's harder for struggling malls to turn around, as their declining economics make it difficult to attract capital.

Green Street estimates that 300 malls in the country have inline store sales between $250/sf and $324/sf. Many of those are anchored by Sears, JCPenney and Macy's, and they're at most risk of closing. They collectively represent roughly 5 percent of the value of the entire U.S. mall universe.

Moody's Investors Service recently noted that malls with inline sales of less than $400/sf are facing the most pronounced risk.

In contrast, roughly 300 malls in the country generate inline store sales of $500/sf or more, according to Green Street. They've doubled in value since the Great Financial Crisis.

But second-tier malls still have a place in the retail landscape. In a 2016 survey by Westfield Corp., 45 percent of U.S. shoppers ranked the traditional mall as their preferred retail destination. Of course, Westfield itself is a mall owner and developer.

While e-commerce is important, it's only part of the retail puzzle. Being omnichannel — that is, successfully spanning physical, mobile and social platforms - is where retail has headed.

A 2016 study of Millennials by CBRE found that 70 percent of the shopping that 19- to 34-year-olds do is conducted in physical stores. Even more encouraging is that 56 percent of this age group likes the experience of seeing a product in real life before buying.

But it gets better. Generation Z, comprised of those born after 1995 and which totals 26 percent of the U.S. population, is expected to generate $44 billion in annual spending, according to a 2017 survey from IBM and the National Retail Federation.

This complex group has never known a world without smartphones or other digital technology. However, the survey found that 67 percent of the Gen-Z group actually prefers shopping at brick-and-mortar stores most of the time and 31 percent prefer in-store shopping sometimes. But they want technology to seamlessly integrate with their store shopping experience and interactive engagement around their brands.

In the retail jungle, the strongest malls will not only survive, but thrive. Some of the others will be lost due to a number of circumstances, such as location and lack of access to capital. Many of those might find new lives as mixed-use developments or, the ultimate irony, as distribution centers for e-commerce retailers.

Comments? E-mail Jen Loukedis or call her at (267) 247-0113.



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Data Digest

 

CMBS DELINQUENCY VOLUME

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CMBS SPECIAL SERVICING VOLUME

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Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44

 

RCA CPPI

 

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CMBS 2.0 Spreads

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Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41

 

 

 

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