Mall Owners Become Retailers Amidst the Pandemic

The Covid-19 pandemic and following shop closures have brought new momentum to the decrease of brick-and-mortar retailing, particularly malls.

More than 50 percent of the department stores that anchor malls in the U.S. will forever close by the end of 2021, based on property investment company Green Street Advisors. There are approximately 1,000 malls in the U.S., a number that may no longer be supported as more people buy online.

Twenty-seven prominent retailers have already filed for bankruptcy in 2020. Among these are mall stalwarts Ascena (Ann Taylor, Loft, and Lane Bryant), Tailored Brands (Men’s Wearhouse), Lord & Taylor, Brooks Brothers, Lucky Brands, J.Crew, J.C. Penney, and Neiman Marcus. Although a few will reorganize with new funding and new possession, many may not find buyers and have closed down. Including Lord & Taylor, the oldest department store in the country, and home goods chain Pier 1 Imports. Both are liquidating.

Consulting company Coresight Research estimates that 20,000 to 25,000 physical U.S. retail shops will close this year, with at least 50 percent located in malls. Before Covid-related shop closures, many retailers were struggling to earn a profit. With limited foot traffic and renters dispensing with lease payments, mall owners have changed their business model to survive.

The Gap ceased paying rent to landlords in April; Simon Property Group sued the merchant.

Mall Owners Adapt

The largest mall operator in the U.S. is Simon Property Group. Its portfolio comprises seven of the 10 most precious malls (Class A) in the nation. In 2016 it combined with brand manager Authentic Brands Group to make SPARC (Simon Properties Authentic Retail Concepts) to purchase bankrupt retailers. That year it purchased Aeropostale. Earlier this season SPARC re-formed to respond to the special challenges of the outbreak, with the aim of purchasing distressed retailers, mostly people in bankruptcy, at attractive prices.

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SPARC has embarked on a buying binge, and it has bought retailers Brooks Brothers, Lucky Brands, and, most recently, J.C. Penney, which is an anchor store at many of Simon’s possessions. SPARC, in partnership with rival mall owner Brookfield Property Group, also purchased women’s clothing chain Forever 21. Collectively, they currently own and run 1,500 stores through acquisitions.

In May Brookfield announced it plans to spend $5 billion in fighting retailers. But this week. Brookfield laid off 20 percent of workers in its retail division.

Urgency

Many mall rentals include”co-tenancy” clauses that enable retailers to pay lower rents or break a lease if deductions hit a specific threshold. Anchor shop closures can have a domino effect and result in an whole row of vacant stores. That is why maintaining anchor shops in business is so vital.

By way of instance, J.C. Penney stores anchor about half of Simon Property Group’s malls. Obtaining the series gives Simon access to about $3.6 billion of property when stabilizing its retail area. Penney, which has more than 850 stores, constitutes about 19 percent of mall anchor space.

Also, some renters have ceased paying rent, and mall operators will need to keep a specific volume of foot traffic for mall reopenings so that tenants may attract clients and start paying rent again. Simon gathered only 51 percent of rents for April and May. The situation improved in June and July with Simon getting 69 and 73 percent of rents, respectively.

Simon Property isn’t solely relying on merchant acquisitions. It’s also in talks with Amazon to turn empty space at its malls into ecommerce distribution facilities. Other mall operators are thinking about turning vacant retail space into physicians’ offices, gyms, and grocery stores. Some owners have demolished their malls and transformed the properties to industrial usage. In the past three decades, 13.8 million square feet of retail space was converted to 15.5 million square feet of industrial use, according to commercial real estate company CBRE Group. Much of the space was in malls.

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Some mall operators are betting on high-end services such as spas, yoga studios, and entertainment venues. Restaurants offering over food-court fare are being wooed by some mall operators.

Landlord or Competitor?

Many retail analysts are doubtful that mall warehouse space can coexist with retail use, particularly in high-end malls. Shoppers don’t want to walk past an industrial area on their way into a luxury retail shop.

Moreover, once an operator owns a merchant, others in the same mall might see their landlord for a competitor. Some might decide to move to another place without the friction.

Mall operators are property experts, not retail specialists. Turning around already fighting chain stores won’t be easy.