Regional Mall Owners Focus on Adaptive Reuse and Smaller, More Nimble Tenants – NREI



The “old model for mall success is on life support,” industry experts say.

Malls are taking a hit with the loss of anchor department stores like Sears, J.C. Penney, Bon-Ton, Carson’s and Macy, not to mention in-line tenants.

So far this year, U.S. retailers have announced they will close 6,105 stores, while opening 2,658 in 2019, according to global market research firm Coresight Research. This compares to 5,864 closures and 3,239 openings for all of 2018.

In the wake of more than two dozen Sears closures, the regional mall vacancy rate ticked up 30 basis points to 9.3 percent in the first quarter of 2019, reported real estate research firm Reis Inc. However, growth in average rents was flat.

Of the more than 16 million sq. ft. of retail leases signed in the last five quarters—across all retail sectors—Reis reported grocery stores were the No. 1 new tenant, followed by home/houseware stores, gyms/fitness studios, discount variety stores, and discount clothing stores. Trampoline parks—part of the much-talked-about experiential retail—were also in the top 10.

Still, other chains expected to shutter stores this year include J.C. Penney, Payless ShoeSource, Charlotte Russe, and Gymboree, which will impact the roughly 1,200 malls across the country.

As big-box retailers reduce their footprints to concentrate on their most profitable stores, they’re vacating many of the weaker, less-trafficked malls, leaving owners of class-B and -C properties struggling.

Meanwhile, class-A malls in desirable locations are inking deals with higher-paying tenants to backfill besieged anchor spaces—some of which, like those housing Sears, were bringing in well-below market rents under very long-term leases.

Sears plans to close nearly more 200 stores this year, reports real estate services firm CBRE. While some see this as “tragic dumping of millions of square feet of retail space,” many landlords see it as an opportunity to reposition and renovate their properties, even if mall owners will collectively have to invest billions of dollars to renovate the vacancies. “Sears didn’t pay a lot of rent, if any rent, and in a lot of cases owned their own box,” says Jim Sullivan, managing director, and REIT analyst at financial services firm BTIG LLC.

“In general, the rents that landlords will get are multiples of what Sears was paying, and you’re bringing in a retailer or retailers that are better at their business, who generate much higher sales per square foot—whether it’s an off-price merchant like a Ross or Whole Foods or Dicks Sporting Goods. They all pay higher rent. They all do more sales. They all bring more traffic to the mall.”

Across its portfolio of Sears and Kmart stores, Sears was doing about $100 per sq. ft. in sales, according to Sullivan. The productivity at malls owned by the top regional mall REITs, including Simon Property Group, Taubman Centers and Macerich, is multiples of that, he says. “So, if you were to replace a 150,000-sq.-ft. Sears with a 12,000-sq.-ft. Cheesecake Factory, which does like $1,200 a foot, you’re replacing all the sales that Sears was doing with one restaurant that sells cheesecake.”

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Written by:
Liz Wolf | May 02, 2019 | National Real Estate Investor