How will property owners and cities fill in the holes left behind by malls?
By Ashley Fahey
Tampa Bay Business Journal
Published: Nov 22, 2021

Editor's Note: The American shopping mall — long an icon of the nation’s suburban expansion — has for years had to evolve amid changing consumer tastes. Covid-19 has only hastened the disruption by diverting foot traffic away from brick-and-mortar retailers and, to a degree that’s still an unknown, permanently altering the ways in which shoppers buy goods and services. This story is the second in a series from The Business Journals that looks at the current state of the American mall, the challenges and big debts the landlords face, and what's next. Read the first installment here and the second here.

Showrooms and experiential retail, green space, mixed-use development, hybrid fulfillment-retail centers: There's no shortage of ideas about what will make the post-pandemic mall a success.

Moody's Analytics estimates some 20% of approximately 1,000 malls in the U.S. today will be sold or repurposed in some way. Elected officials and other stakeholders in towns and cities across America are actively lobbying for new uses for malls on the brink or that've already failed.

For retailers, brand and visibility remain king. Experts believe it's unlikely any retailer will entirely pivot away from a retail footprint in favor of distribution hubs and supply-chain investments.

Even Amazon.com Inc., the e-commerce giant frequently blamed for much of the decline of bricks-and-mortar retail, has found value in opening storefronts in retail properties. That underscores the importance of brand identity and experience, said Barrie Scardina, head of retail for the Americas at Cushman & Wakefield PLC.

Still, it's obvious that many retailers, including mall mainstays, are allocating huge sums to bolstering their warehouse real estate.

There's been some exploration of converting back-room storage space in some stores to fulfillment uses, to act as something of a last-mile distribution center. But with a persistent labor shortage keeping the retail industry, among others, in a vise grip, adding a labor-intensive fulfillment operation in a store may not always be feasible.

Naveen Jaggi, Americas president of retail advisory services at Jones Lang Lasalle Inc., said some retailers are looking to develop or open micro-fulfillment centers in locations close to consumers, spaces totally removed from their retail footprints. He said there are also a number of emerging players, such as Gopuff and JOKR, focused on last-mile delivery of consumer goods, including same-day delivery.

A common strategy in years past for retailers was to saturate a region with stores to gain market share. Today, retailers are taking a hard look at their footprints and where they need to either close or relocate stores or distribution centers, and also pinpoint where exactly their consumers are located, Scardina said.

"What all retailers are doing is reviewing their profitability: where are their opportunities, where do they have consumers where they don’t have stores, where do they have high saturation?" she said.

Even pre-pandemic, empty department stores in malls were being leased to non-traditional retail tenants, such as entertainment uses, and even non-retail groups, including medical office or educational facilities. Green Street Advisors LLC found earlier this year that traditional strip-center tenants — think off-price retailers, fitness centers, grocery stores and furniture retailers — made up 35% of Class A mall anchor replacements and 54% of B properties.

Non-retail uses made up 8% and 9%, respectively, of A and B mall anchors.

But how much foot traffic these non-traditional uses will bring to the rest of the mall, a key role of the mall anchor tenant, has yet to be determined.

Also in consideration: how broader pandemic trends, such as where people are moving and the impact of remote work on future office space usage, will affect the broader retail industry and, more specifically, malls. Some malls in America count on weekday foot traffic from office workers running errands or grabbing lunch, activity that has evaporated or significantly scaled back since Covid-19.

"I think there’s going to be a large shakeout," said Sucharita Kodali, vice president and principal analyst at Cambridge, Massachusetts-based research and advisory company Forrester Research Inc. "What’s left is going to have to offer a heck of a lot more of everything to be viable."

That could mean mixed-use development, more events, new amenities and services, and other offerings to diversify income sources and to bring foot traffic to retailers.

Partial or full conversions of mall properties into distribution-type uses has become a popular topic but comes with its own set of challenges.

A rezoning and other land-use processes, which require the approval of a local government body, are typically needed to allow a fulfillment use on an old mall property. Despite the huge growth of e-commerce, especially since Covid-19, many elected officials and residents are reluctant to see their local mall become a distribution center.

"Most cities don’t want to see a retail center as anything other than retail," Jaggi said, adding they may perceive a correlated negative impact on tax income, home values and other effects. "It’s not easy to convert it to a non-mall use."

Malls are among the biggest employers and taxpayers in some U.S. towns and small cities. Closures or devaluations of those properties would have significant ripple effects on the local economies in which they're situated.

"The city is counting on those tax dollars to pay for police, schools and (other things in) the community, and those tax dollars are drying up," Scardina said.

For some U.S. cities and surrounding metros, the potential fallout relative to distressed loans runs in the billions. In New York City and its surrounding areas in New Jersey and into Long Island, approximately $4.5 billion in commercial mortgage-backed securities debt backed by anchored retail properties was in some state of distress. That was equal to about 44% of the region’s anchored-retail debt held by CMBS portfolios at the end of September.

Like so much else about malls and commercial real estate, especially since the pandemic, a lot depends on the property itself: where it's located, the broader economic story of the region it's in, what uses are feasible for that metro area and site, and how much capacity the owner has to spend on the property.

Embarking on a mall redevelopment, whether to retrofit some of an existing mall to new uses or to redevelop it entirely, is also extremely expensive. Scardina said it costs hundreds of millions of dollars, frequently, to do a total redevelopment.

Experts say malls will continue to face upheaval in the coming years and will have to keep innovating to stay relevant and successful. But the death of the mall entirely seems, to most, unrealistic.

"We have an opportunity to make upgrades and to enhance our structures and repopulate in probably 70% of the malls out there," Scardina said. "The balance, we’ll have to sort out."