Shopping malls in the U.S.
were once known for their massive department stores, endless fast-food courts, it as a Friday night hangout
for teens. But with the rise of online retailers and the demise of the department store, it is a challenging time
to be a mall owner.
In November 2020, two mall owners, CBL & Associates and Pennsylvania Real Estate Investment
Trust, filed for Chapter 11 bankruptcy protection after facing increased pressure due to Covid-19.
And according to a 2020 study, 25 percent of U.S.
malls are expected to close permanently within the next five years.
I think Covid really accelerated trends that were already at play prior to the pandemic.
It was retailers closing stores, retail bankruptcies.
Retailers were looking for ways to renegotiate leases or pay less in rent.
There are going to be malls that fail and they're going to be vacant spaces.
What happens to them into the future?
I just know in the Syracuse area we have one and the county just purchased it.
I don't know what the plans are, but it's a lot — a lot of empty space and a lot of parking spaces sitting
there doing nothing. Prior to Covid-19, with consumers craving experiences over traditional brick-and-mortar
retail shopping, malls were forced to pivot, offering everything from fine dining to indoor ski slopes.
But the pandemic has exacerbated the challenges at malls as social distancing has placed restrictions on
stores, movie theaters and restaurants.
You will see more malls closed.
You'll see more shopping centers closed.
But what you'll see is the winners continue to emerge.
Malls are also a huge tax driver for the communities they serve and employ a lot of people locally.
So what will become of malls in America after the pandemic ends?
Malls in the U.S. took root at the end of World War II, alongside the growth of the suburbs.
In the 1950s, a booming economy helped a large segment of the population increase their prosperity, allowing
many Americans to purchase a new home and car.
Aided by a series of government initiatives, like the Veterans Administration Home Loan Program and the Federal
Aid Highway Act of 1956, a significant slice of the country was turning their back on cities and
heading to the suburbs.
Austrian born architect Victor Gruen, the man who many credit with later helping to provide those newly minted
suburbanites with a place to mingle and shop, saw an opportunity.
Gruen emigrated to the U.S.
following Germany's 1938 annexation of Austria.
Once in the U.S., he established himself in the world of shop design by refurbishing retailers, including at least
one store on New York's Fifth Avenue.
In 1954, Greun's design of the Northland Center outside of Detroit, Michigan, debuted, making it
one of the largest open air shopping facilities in the U.S.
But Gruen, opposed to the country's growing reliance on the automobile, wanted to create an atmosphere similar to
his native Vienna — one of streets sprinkled with cafes, restaurants and commerce.
In 1956, his design of a Southdale shopping center opened in Edina, Minnesota.
The fully enclosed mall had a two-level design featuring 72 stores and anchored by two major department
stores. The space also had 5,000 parking spaces and central air conditioning.
The modern mall was born.
You'd load up in a station wagon and you drive to the mall and everybody in the family would get
that one thing they needed while the family was there.
More than 40,000 people attended Southdale's opening day.
The venue was largely considered a success and was soon replicated across the country.
By 1960, there were 4,500 large shopping centers in the U.S.
By 1987, malls and shopping complexes accounted for over 50 percent of all U.S.
retail sales.
And they were becoming part of pop culture too, used as a backdrop for movies like Back to the Future, Mallrats
and Terminator 2.
And even as a springboard for musical acts.
And malls were getting bigger.
In 1992, the Mall of America, the largest mall in the U.S., opened adding attractions like roller
coasters and an aquarium.
But the explosion of new construction was beginning to weigh on some locations.
From about 1975 to 2016, retail space capacity in
many cases in malls multiplied by four times the rate of population growth in
the United States. So in 2016, every single person in the United States had
24.6 or so square feet of retail space that could just be theirs.
The rise of big box stores like Walmart, discount retailers like HomeGoods, and the transition to
e-commerce weighed on malls too.
This has been the narrative for years now that we really got to a point where we're overbuilt.
We have too much retail space in the country.
Now that retailers are growing more of their business online, inevitably, that means, you know, they don't need
as many stores. So we've seen those store closures.
By 2017, there were roughly 1,200 indoor shopping malls in the U.S.
And yet if you look at retail pre and post the credit crisis, before the credit crisis, people used to walk
around in T-shirts that say "I way overpaid for this t shirt." Suddenly after the credit crisis, they
were all going for these things - phones -spending thousands of dollars on a phone that they used to get for
free. So the point is that people change their shopping habits.
And what needed to happen for the malls is that they needed to evolve as well.
According to a 2020 IBISWorld Industry report, the shopping mall management industry in the U.S.
is an $18.3 billion business and includes companies like Simon Property Group, Brookfield Property
Partners and Macerich.
In general, landlords like Simon make their money from rental income and property management fees.
Of the roughly 1,100 malls in the U.S., about 250 are considered class A malls, the top
performers that bring in the most sales per square foot.
About 380 are considered B malls.
A little more than 300 are categorized as C malls.
And the remainder are D quality or lower, that could be on their way out of existence.
Like a number of their retail tenants, the coronavirus pandemic has had a devastating impact on U.S.
malls. CBL & Associates has a portfolio of about 100 properties across 26 states,
including a number of B and C rated malls.
The company said with tenants not paying rent in others delaying payment, it was forced to file for Chapter 11
bankruptcy protection in November 2020.
Pennsylvania Real Estate Investment Trust, which owns and operates over 22 million square feet of retail space
in the eastern half of the U.S., filed for bankruptcy protection that same day.
Simon Property Group, the biggest mall owner in the country and the largest operator of A rated malls,
including the King of Prussia in Pennsylvania and Roosevelt Field in New York, also saw a steep drop in
revenue after some retailers skipped out on rent payments.
In the fourth quarter of 2020, the company had total revenue of $1.1 billion, down 24
percent from the previous year.
But a healthy balance sheet and a portfolio of desirable locations helped Simon fight back.
Retailers deemed non-essential — their stores were forced to shut, and a lot of retailers thought,
"OK, well, I can't pay rent or I'm not going to pay rent if I'm not operating this store." And
so these mall owners like Simon, like Macerich, they still have obligations on their ends to meet.
They have bills to pay.
They have loans that, you know, are potentially maturing soon and debts to pay off.
And it really became a problem as retailers like The Gap said, you know, "we're not going to pay
rent or we can't pay rent right now."
In June 2020, Simon Property Group sued one of its biggest tenants, apparel retailer, Gap, for failing to
pay more than $65 million in rent and other charges.
The company also went on the offensive, buying distressed and struggling retailers.
In February, 2020 Simon apparel licensing firm, Authentic Brands, and fellow mall owner, Brookfield,
acquired Forever 21 out of bankruptcy for about $81 million.
In August 2020, Simon and Authentic Brands bought men's suit maker, Brooks Brothers, out of
bankruptcy for $325 million.
In that same month, the pair acquired denim maker, Lucky brand, for $140 million. And in December
2020, the company partnered with Brookfield again to purchase J.C.
Penney out of bankruptcy for an estimated $800 million dollars.
And
some place a big bet on the future of luxury malls, too.
In December 2020, the company acquired an 80 percent interest in rival high-end mall owner, Taubman Center.
Taubman owns two dozen malls, including a handful in Asia that have stores like Tiffany, Gucci and Prada.
But unfortunately, there are a lot of centers that don't fit that high profile and that have lost their
competitive edge. The thing about Simon is they've been really focused on maintaining it, and that's both been
through a combination of culling the lower productive centers, as well as making sure that they
keep investing in their top centers to ensure that those centers remain dominant in their respective trade areas.
While malls in the U.S. were struggling and shutting down prior to Covid-19, according to an August 2020 report by
Coresight Research, the pandemic has accelerated that trend.
The research group said that an estimated 25 percent of U.S.
malls could close over the next three to five years.
Some experts think that number could go even higher.
I think everyone agrees that we will get to a point where there are fewer malls in America.
You know, some experts have pegged that we have roughly 1,100 malls today.
Maybe we only need 25 percent of those.
We're already seeing it's fascinating the, you know, the strong are getting stronger and their vacancy rate, as
you know, is very low, single digit.
And the reason for that is because the tenants are realizing where the traffic
is and they are leaving their traditional, let's just say, mall locations and moving into,
you know, stronger malls, whether it be A, A plus.
And according to analysts, the locations likely to survive are those well capitalized A rated malls that
offer more than your traditional shopping experience.
The Phipps Plaza Mall in Atlanta, run by Simon Property Group, houses brands like Saks Fifth Avenue and
Tiffany's. The mall is opening a Nobu Hotel and restaurantand a 90,000 square foot lifetime athletic
center. And a 13-story class A office building.
The Northgate Mall in Seattle, also run by the group, has shops like Nordstrom Rack and has plans to launch an
NHL Seattle corporate complex with three ice skating rinks, 1,200 luxury multifamily residences
and hotels. It's not just, hey we're a mall and all we do is offer mall product, right?
It's no, we're a retail center.
We're a dominant part of the community.
How can we make sure we get more than our fair share of the commerce that's in that market?
And that's why you see them branching into restaurants, adding things like hotels, self-storage,
apartments, office, other uses to the mall.
A lot of these malls, as they're finding new uses and a way to repurpose them, it's going to be case by
case. I think you have to go into the town.
And that's what a lot of these mall owners are doing right now and seeing what the town needs.
You know, is it a medical office building or a school potentially or a church,
more office space or maybe a new residential community?
According to analysts, other ways malls could remain relevant is by transitioning to essential services that
provide steady cash flow and stable occupancy in areas like health care and grocery stores.
Last-mile fulfillment centers could be an option for some, too.
According to an August 2020 news report, mall owner Simon Property Group was in talks with Amazon about
potentially turning some of its former Sears and J.C.
Penney locations into warehouses.
A potential obstacle is the locations may need to be re-zoned by local governments for industrial use.
And top performing malls have seen a glimmer of good news, too.
According to placer.ai, while mall visits in the best performing malls plummeted in the spring of 2020, they
climbed over the summer and into the early fall.
A December rebound to the mall was led by holiday shoppers.
The issues facing the malls and retail really are not tenant driven, they're capital driven.
Malls, like fashion, are very expensive.
You know, you got to spend a lot to look good.
And certainly when you look at malls, if you don't have the capital to make sure that your
facilities and your offering and just the building appeal isn't
top tier, you start to lag and then that affects your ability to lease.
And at some point it becomes sort of a downward spiral that's hard to get out of.