The Changing Face of American Malls

And what once was the home of department stores

Author: Andria Cheng

May 5, 2017

The steady drumbeat of store closings and retail bankruptcies may seem like a death knell for American malls. But malls are far from dying. They're just taking on a different kind of identity.

At No. 2 US mall developer General Growth Properties (GGP), which manages such properties as Bridgewater Commons mall in New Jersey and Spokane Valley Mall in Washington, the percentage of its space occupied by restaurants and other food sellers is forecast to increase to 20% by 2025 from 13%, said GGP CEO Sandeep Lakhmi Mathrani in an earnings call on May 1.

Restaurants aren’t the only mall share gainers. As US box office sales hit a record $11.4 billion last year, GGP has inked close to 60 movie theater deals in its properties, Mathrani said, adding entertainment deals will continue to rise. On the other hand, apparel will decline to about 40% of GGP’s property mix, down from about 50%, he said.

The changing face of the American mall is another sign of consumers' shifting priorities and tastes, with an increasing preference to spend time and money on experiences and services.

This year the Limited and Payless ShoeSource were among the retailers that filed for bankruptcy, while mall anchors including Macy’s, JC Penney and Sears have announced a raft of store closings.  A recent JLL Research study suggested as many as 324 department stores will soon be empty. 

Sales of apparel tenants at GGP’s properties declined by 1.8% in the most recent quarter, compared with gains in electronics, food, home furnishing, health and personal care segments. Theaters, mall entertainment, supermarkets and other categories GGP counts under "miscellaneous" were among the top performers, with sales up 6.7%.

In place of traditional department stores, GGP has leased space to HomeGoods and Marshalls, both owned by industry outperformer TJX, parent also of TJ Maxx, and to  beauty products retailer Ulta Beauty and PetSmart. A part of the Sears store in Staten Island Mall has been taken up by popular European fast-fashion retailer Primark, and German supermarket chain Lidl also will move in to take some of Sears’s space. GGP also plans to add Shake Shack, Dave & Buster’s, Apple Bank, Ulta and Z Gallerie as part of its expansion of the mall. 

Elsewhere, non-traditional mall tenants including grocers Wegmans and Whole Foods have also moved to malls.

“We're experiencing demand from grocery stores, cinemas, innovative entertainment venues, fitness center, and the list goes on,” Mathrani said. “As an owner of retail real estate, we must constantly evolve. You see it in our leasing activity and the evolution of our tenant roster. Names at the top a decade ago have changed and have been replaced with tenants today that have an emotional connection with their customer and are profitable operating from our centers.”

Simon Property Group, the largest US mall developer, with properties including King of Prussia Mall in Pennsylvania, also sees declining apparel penetration. For instance, the company is turning the Penney store that’s closing at King of Prussia to a “mixed-use development” and won’t be apparel oriented, said CEO David Simon on an earnings call in April.

“Apparel has been in the doldrums,” Simon said. “We are moving our mix away from that.”

Up to 20% of malls, typically older, run-down malls in less-desirable locations, will have to be repurposed or closed. Outperforming malls have picked up the slack, and are collecting higher rent from new tenants than traditional department store anchors, which have paid very low rent.

For instance, Seritage Growth Properties, a real estate investment trust that was spun off from Sears Holdings, has re-leased space Sears is shutting down at an average of 4.4 times the previous rental rate, the JLL study showed. It said Sears, which also owns Kmart, pays an average of $4.40 per square foot across its portfolio, compared to $12.74 paid by in-place third-party tenants. Those that have yet to move in are paying an average of $18.55, according to JLL.

“High-quality retail properties should continue to gain market share,” said GGP’s Mathrani, adding the company has already released nearly 80% of the space that was vacated as a result of store closing or bankruptcies. He expects the rate to recover to about 97% this year.

“The divide between high-quality retail real estate and the rest is getting wider,” he said. “The best centers are thriving and will continue to do so.”

Simon Property’s Simon also said the company’s leasing activity remains solid with average base minimum rent up 4.4% compared to last year. In fact, at its malls and premium outlets, rent per square foot paid on a new lease versus what was paid before rose 13%.

“The traffic is strong,” he said. “It was up throughout our portfolio where we measure it. The narrative (that malls are going out of business) is way ahead of itself.”