Unprofitable local malls need to slash the amount of space they lease to clothing and department stores if they want to survive, a new report from CBRE finds.
As has been widely reported, customers simply aren’t stepping into department stores and major apparel chains as much as they used to. The drop in retail sales has slowed down operating income for regional malls, which lean more heavily on clothing-oriented tenants than their larger, “super-regional” siblings, according to CBRE’s report covering U.S. mall performance. Super-regional malls—defined by the International Council of Shopping Centers as having at least 800,000 square feet of retail space—are more likely to have a diverse mix of tenants.
As e-commerce eats away at traditional retail revenue, “experiential” retail, like restaurants, gyms, movie theaters and bowling alleys, is bringing in more revenue and growing more quickly than clothing stores.
Distressed regional malls need to “diversify their tenant mix to limit their exposure to slow-growth categories, which include apparel and department stores,” Melina Cordero, the head of Americas retail research for CBRE, told Commercial Observer. “It isn’t advisable to fully eliminate apparel and accessories, as those still are a significant proportion of retail and mall spending. Rather, the implication is just the need to diversify and reduce their dependence on those categories, which traditionally has been extensive.”
National retail sales growth for restaurants shot up 35 percent over the past five years, according to the report, while department store sales slid 15 percent in the same period. However, many other types of brick-and-mortar retailers have been chugging along just fine. Health and personal care stores (which include pharmacies, beauty stores and health supplement sellers) saw retail sales grow 20 percent between 2011 and 2016, while home furnishing stores saw a 25 percent sales increase.
“The one thing that the internet can’t compete with is in-person experiences,” Cordero said. “That’s exactly what a lot of landlords are looking for—for the concept to come in and you’re already getting steady traffic.”
But mid-sized malls are yoked to huge and unprofitable department stores. The average American mall leases 49 percent of its space to department stores, CBRE notes, with another 29 percent rented to apparel, accessory and shoe stores.
And it’s no secret that both types of retailers are losing steam quickly. J.C. Penny shuttered 138 stores in July. Macy’s closed 70 locations last year, and announced plans to shutter 34 more in February. Discount shoe seller Payless has shut down 900 stores since April.
Still, it’s not easy for many malls to change their tenant mix. Landlords took on major clothing chains and department stores because they were high-credit tenants. Experiential tenants like restaurants “are not coming to the table with as many guarantees as a multinational apparel chain,” explained Cordero. “It’s a credit risk. [As a landlord], I need to be sure that my investors are confident in the value of the asset long-term. If you have a lot of tenants that are on shorter-term leases and are not as large credit players, you have a risk in the asset because there’s a higher probability that these tenants might not work out.”
And many department stores in malls are locked in for leases of at least a decade. Big, well-capitalized retail landlords like General Growth Properties and Simon Property Group can afford to buy out cash-strapped anchor stores and put in more profitable tenants, Cordero said. But smaller owners may have to simply ride out leases for struggling tenants or scrape up outside investment to buy them out.