Much has been written and continues to be discussed regarding the changing face of retail. Many of these conversations inevitably include regional malls – largely non-Class-A – across the country struggling to find their footing in the wake of retailer bankruptcies and store closings. Sears is the latest and most prominent example with its recent announcement that it will be closing scores of stores from coast-to-coast.
As mall owners and operators grapple with these challenges, I would argue that the problem is not the bricks and mortar retail model but, in a broader sense, that retail has failed to adapt to new realities. And I’m not talking just Amazon.
So what do we know? Things can be tough out there. Sears is whittling its portfolio down to about 300 stores. That means some 200 Sears locations are going dark, and possibly many more. When you consider the average gross square footage of each store at around 136,000 square feet, simple math tells us an astounding 27 million square feet of retail will soon be looking to be filled in the malls and shopping centers that formerly housed them. And when a major anchor vacates, the closure often acts as a blight for the entire retail center.
Exacerbating the problem, of course, is the fact that Sears and its affiliates often own that real estate, leaving the mall owner/operator largely at the retailer’s mercy for what happens next. Certainly, you can’t control what you don’t own. Plus, many times there are issues related to co-tenancy clauses in the contracts of a mall’s smaller retailers where rents are reduced when anchor traffic diminishes. Indeed, it can amount to a “double whammy” and the perfect storm that can reverberate throughout a property. In some cases it is a death knell for the center.
An example in suburban Detroit is the one-time Summit Place Mall. Originally opened in 1962 as one of the first enclosed malls in the state, the 74-acre site in Waterford, Michigan, encompassed nearly 1.5 million square feet after expanding in 1987 and 1993. In its heyday, Summit Place Mall was home to 200 in-line tenants and six major anchors including Marshall Fields, Sears, J.C. Penney and Kohl’s. By the 2000s, anchor closures had taken their toll culminating with Kohl’s finally vacating in 2014. The property was subsequently purchased but the mall continued to sit vacant for years as ownership debated the costs and challenges of retail redevelopment. That continued until the City of Waterford – obviously tired of inaction and the continuous erosion of its tax base – named the property to its “dangerous buildings” list. The site is now slated for demolition and, it appears, a potential tech park.
I reference the Summit Place Mall example especially as it relates to municipal relations. A top priority when working with stakeholders of large, distressed retail properties is to begin discussions with the economic development team for the city in which the mall resides. Quite often those conversations include the mayor, city manager, councilmembers and the economic development director. That dialogue typically begins with: “We have a mutual problem.” After all, the municipality also has a major stake in the property’s future and what a continued troubled state for the property may portend for the surrounding area, if not the entire city.
Such a dialogue must be frank but also collaborative since cooperation is paramount. Sometimes flexibility in zoning and site layout is needed to overcome existing land use challenges and attract new tenants. There may need to be an investigation and discussion of available tax incentives for redevelopment that will spur growth. Sometimes change is painful but often it is the only way to move beyond the current issues and to develop a corrective course of action that will potentially benefit everyone.
By way of a real world example, a suburban Chicago city was home to a large, regional mall that was struggling and needed redevelopment in order to stabilize its existing tenant and attract new ones. After several rounds of discussions, we were able to secure a governmental commitment for tax increment financing; that is, a municipal investment in the property’s redevelopment that is paid for by the future increase in real estate taxes attributable to the property. Another creative financing option is exploring potential redevelopment dollars via municipal bonds that are repaid through increased sales taxes from new tenants at the reinvigorated property. While the precise options are subject to local and state programs, our strategy has been successfully deployed in other geographies, including Ohio and Oklahoma. Short-term solutions for long-term, positive ramifications often make good sense.
So why are so many mall properties failing? Despite what you read or may think, Amazon and online retail are not the Goliaths many make them out to be. The fact is only 12 percent of retail sales happen online and those sales are oftentimes for inexpensive, commodity-type items that consumers would rather not take the time to go the store for (think laundry detergent, vitamins, diapers).
However, the internet has forced retailers to pay closer attention to consumer trends and preferences and then rethink the types of products they offer, how and to whom. For decades, Sears and other department stores were a destination for clothing, appliances, furniture and virtually everything retail under the sun. As the brands matured, they neither evolved their images nor offerings to stay current and relevant. As a result, they were eventually surpassed by the Targets and Ikeas of the world with trendier clothing and home goods and more competitive pricing. Likewise, Sears’ dominance for sales of power tools and appliances was supplanted by Lowes and Home Depot – destination buildings more palatable to the often mall-averse male. Know your customers and know they are going to continually change over time.
To me, it is a bit reminiscent of how the Big Three automakers operated in the 1980s. They routinely took their customers for granted and became complacent in new product development and quality. As a result, foreign automakers made huge in-roads into the U.S. automobile market by offering more style and amenities, better gas mileage, more competitive pricing and increased quality. It was a painful lesson for the major automakers and for this country.
In retail, there must be a value proposition. And to find it today, one need only look at how retail was offered yesterday – before malls. Cue the irony here and read on.
As Petula Clark so famously sang in 1964: “Downtown….everything’s waiting for you.” And that is largely the way it was “back in the day.” Major department stores and mom-and-pop retailers up and down “Main Street” all vying for that almighty consumer dollar until the malls and big boxes lured shoppers away to the suburbs. Today, in cities such as Pittsburgh and Detroit, there is a move back the other way – with redeveloping downtowns offering an exploding list of new and unique retail and restaurants options, many of the “pop up” variety, and a return to the excitement of window shopping and the urban entertainment experience. Many traditional online retailers such as fashion eyewear maven Warby Parker are taking note of this phenomenon and increasing openings of urban storefronts where their customers can actually touch, feel and try on what they normally see and shop for via laptops and mobile devices.
Many savvy mall operators have also taken note of this vibrant “downtown experience” and are working to translate it to their retail centers. People want to be where the action is and be a part of something that is new and exciting. To meet this demand, limited-run retailers and restaurants are popping up more and more, and I am not referring to the traditional seasonal operators such as Pepperidge Farms and calendar stores. In this instance, boutique clothiers and top-notch restaurants are being featured on a limited edition basis designed to generate “buzz” and drive traffic. Aggressive marketing can create a “snooze you lose” message that then portends a timely call to action: Get here or miss out. The spectrum of the pop-up retailers are unlimited and have ranged from Kanye West’s clothing boutique to Google technology showcases.
Overcoming retail adversity today takes creativity, vision and an ability to reinvent while, at the same time, look back at what has worked in the past and why. It takes open communication with municipalities and a willingness to collaborate toward identifying opportunities and solutions to challenges. It also means not surrendering to an online environment often perceived as Genghis Kahn.
There can be a light at the end of the tunnel for struggling mall owners and operators with a thoughtful approach and an understanding of who your audience is and what will keep them coming back for more.
Matthew Mason spearheads Conway MacKenzie’s real estate industry vertical. He is accomplished in assisting institutional clients, lenders, retailers and private investors with distressed real estate and has served as a court-appointed receiver for more than 200 retail, office, multi-family and mixed-use projects. Mason has extensive experience with acquisitions, dispositions and lease negotiations, having completed 14 million square feet of leases with a value in excess of $885 million.
