RETURN OF THE MALL
The enclosed regional mall — the uniquely American retail property that sprang to life in the 1950s and 1960s — has been declared dead (or dying) for years.
The list of grievances was long.
Malls were too large.
Their temperature-controlled environments were too artificial.
Department stores — the original conceit around which the concept was developed — were not the draws they once were.
Mall parking lots were too sprawling and mall parking garages too arduous to navigate.
Formats like power centers, lifestyle centers and mixed-use facilities were newer, hipper and more convenient.
And, of course, there was the constant growth of internet retail, which continues to slowly eat away at traditional retail channels.
In response to these factors, mall owners were pressured to adapt and change. Many constructed lifestyle center add-ons to existing malls or explored how to make properties mixed-use. Others redeveloped dated centers to make them fresher and brought in the best elements from other retail concepts. In addition, firms stopped building new regional malls entirely. (In fact, 2011 will mark the fifth anniversary of the last ground-up enclosed regional mall in the country.)
“The regional mall has been going out of style for 30 years,” says
But a funny thing happened over the past three years.
As the Great Recession unfolded, regional malls — rather than being pushed to the brink — weathered the storm better than any of their supposed replacements. The very things that made fortress malls seem so outdated — their size, their enclosed environments, their dependence on anchors — proved to be powerful assets instead.
Quarter after quarter, U.S. regional mall REITs have outperformed shopping center REITs, beating analyst estimates and occasionally posting NOI growth. By 2010, class-A regional malls shot up to the top of both retailers' and real estate investors' list of preferred product types.
After bottoming in
Malls took some cuts in occupancy rates, but not nearly as much as other sectors. From the first quarter of 2008 through the first quarter of 2011, regional malls experienced a vacancy increase of 210 basis points, according to the
“The regional mall has never been more vibrant than it is today,” Sokolov says. “It's an extremely efficient channel of retail distribution. The performance of regional malls has been very consistent, very stable, and as we enter a period of economic growth, the malls are very well positioned to take advantage of it.”
Indeed, the very tenants that talked of severing ties with enclosed regional malls a few years ago are returning to the bargaining table. Moreover, some retailers that always favored power and lifestyle centers in the past are now coming around as well, says Lebovitz. “Over the course of the recession, foot traffic fell at lifestyle centers and the sales targets did not meet their original expectations,” he says. “And a lot of those retailers have now come back to the mall as their preferred type of real estate.”
Regional mall owners have recently started to sign leases with
“The verdict is malls are very much alive,” says
To be sure, challenges remain. There continue to be wide disparities between top-tier malls and lower grade assets. Many mall owners are exploring offloading the lowest quality assets in their portfolios. And there is little, if any, room for new enclosed regional mall development.
Instead, what's likely to emerge over the next several years is a retail landscape with somewhat fewer regional malls than exist today. The malls that will remain, however, will not be dying beasts. Instead, these survivors will continue to be retail stars and the centers of their respective markets.
Forces of nature
So how to account for the mall's comeback?
An important point that many retail industry insiders forgot during the boom years was that malls became a hugely popular retail concept for a reason. The developers that created the country's first regional malls picked their sites based on strong demographics and wide trade area pulls, says
“It's about having great real estate, a great location and critical mass — at least 500,000 square feet of space, and great retailers,” says
An example of this approach is
The success of the mall has largely been a function of its positioning in a densely populated area with high household incomes, says
Malls were also meant to be more than just shopping venues — when Austrian-born architect
In a lifestyle, power or grocery-anchored shopping center, a shopper typically heads to one store, buys whatever he or she needs and heads back to the car, Macke notes. An enclosed regional mall is the kind of venue where the shopper can spend an entire day, wandering from one store to another.
Take the
“I think that the typical good regional mall is an entertainment destination,” says
What's more, the two segments of the retailing world that have experienced the greatest comeback in the past two years have been luxury and value chains. Luxury retailers' expansion strategy has always been to go into stores on high traffic urban streets and into upscale regional malls, says
Meanwhile, some of the value players that have previously had a limited presence at malls, including department store
In the months immediately following the onset of the recession, foot traffic at malls did experience a precipitous drop, says
“Obviously in the Great Recession, there was a greater focus on price and the regional mall is not the warehouse, it's not the cheapest venue for the delivery of goods,” says Taubman. “On the other hand, the mall's great strength is that it provides a social experience and continues to be the most important way to sell fashion merchandise in America. It's a very flexible venue that can change its merchandising strategies to meet the needs of the market.”
Malls suffered some setbacks tied to department store bankruptcies in 2008 and 2009, including liquidations of Mervyn's and
Meanwhile, many of the sector's remaining mainstays have been posting improving fundamentals. In fiscal year 2010, department stores as a group posted a same-store sales increase of 4.1 percent, according to ICSC, above the 3.5 percent figure for all ICSC-tracked retail chains. In the first four months of 2011, their year over year same-store sales growth has averaged 2.7 percent per month.
Even when department stores leave, their boxes can often be repositioned to draw in regular foot traffic, notes Glimcher. At some centers, Glimcher has been using former anchor spaces to bring in a wide selection of restaurants. At others, the firm has brought in big-box retailers.
Finally, the fact that most of the class-A and class-B regional malls in the country today are controlled by publicly traded REITs with decades of experience and easy access to capital could also have been a factor in the format's resilience, notes Moore. Many of the lifestyle centers built in the early and mid-2000s were run by private players who didn't necessarily have a good grasp of the retail game. They also rarely had the clean balance sheets and recapitalization opportunities available to the REITs, adds Glimcher.
“I think it's a testimony to how good the REIT operators are,” Moore says. “The lifestyle center came after the regional mall and in many places, there was often a regional mall nearby, so there was always a tug of war between the existing center and the new guy on the block. And in most cases, a good regional mall is still a dominant asset in the market.”
Tenant sales per square foot for the four mall REITs covered by
As a result,
In the first quarter, vacancy at regional malls reached 9.1 percent, according to
The decline — a hiccup in the mall's recovery rather than a harbinger of a long-term trend — could be attributed to an echo effect from anchor vacancies that afflicted the regional mall sector in 2009 and early 2010, Reis researchers explain. As some anchors exited malls, a few in-line tenants have followed suit.
Yet the vacancy rate for regional malls is still lower than the rate for neighborhood and community shopping centers, which stands at 10.9 percent. Many analysts expected neighborhood and community shopping centers to outperform other property types during the Great Recession because they rely on necessity-based shopping. But those centers also feature a significant number of local and regional retailers, which were at greater risk of failure during the credit crunch than the national credit-rated tenants regional malls rely on, notes Simon's Sokolov.
“The vast majority of our tenants are very credit-worthy and to the extent that they had obligations on their leases, they had to honor them and they did,” he says. “Compare that to the community centers, which had a [greater] reliance on local retailers. Those tenants were less capable of withstanding the economic shock.”
Challenges remain
That's not to say that owners of enclosed regional malls can sit back in smug satisfaction. Those who run class-A and class-B malls will have to continually refresh their properties to keep them relevant to the consumer with the most popular retailers and plenty of entertainment options, says Moore.
There are plenty of class-B- and lower assets around the country that might never regain their footing, notes Winn. Unless those properties can once again become the dominant retail centers in their trade areas, an extremely hard feat to achieve, according to Sokolov, they will eventually have to be razed or redeveloped into other uses.
“The question is what happens to malls anchored by tenants who have not fared well?” Winn asks. “There is still some evolution going on and I am not sure how it will shake out. It's really dependent on what happens with the retail brands themselves. That's one of the lessons from the past decade: people come into the mall for the retail brands, not for the brand of the mall owner.”
Out of the 1,437 regional and super-regional malls in the country today (according to ICSC's figures), the top 700 or 800 properties are here to stay, ventures
The best way to look at the situation is to follow the most successful mall-based retailers, like Victoria's Secret and
“You are seeing a lot of REITs looking to sell what they call ‘non-core’ properties' — in a lot of cases, they are non-performing properties,” Cafaro notes. Indeed, Simon, General Growth and
In some cases, what's happened is that owners haven't been able to invest enough capital in the properties because they lost several anchors during the recession and couldn't replace them, notes
Some of those assets can be saved if they get repositioned to better serve the current needs of their market. For example, in areas where the average household income has dropped, mall owners might be able to regain market share by bringing in value-oriented stores like
“I think over the next few decades the stronger malls are going to continue to grow and the weaker malls are going to lose market share,” Sokolov says. “That's why we are so focused on renovating our properties and making sure they are well-leased and well-marketed.”
In fact, the emerging strategy of adding on non-retail components such as medical offices, schools and government buildings to regional malls might be particularly well-suited to lower grade assets as they will likely struggle to regain national tenants, says PREIT's Coradino. In those cases, a combination of alternative space users with local store operators might be the best hope of keeping the property operating.
New partnerships
In the meanwhile, regional mall owners are aiming to take advantage of current market conditions to siphon off tenants from competing property types. Over the past 12 months, tenants that have traditionally gravitated toward freestanding stores or locations in power centers, lifestyle centers and grocery-anchored shopping centers have started signing leases at enclosed regional malls.
If the trend spreads, it should help the regional malls stay competitive by supplying them with extra foot traffic and establishing them as the dominant shopping destinations for their trade areas, says Macke.
This coming October, for example,
“Both mall owners and
In addition, executives with Simon, CBL and General Growth all say they are in negotiations with supermarket operators like
“Shopping in a mall should be the focal point for the social activity of the community the mall serves and I think one of the biggest challenges is to start working with non-traditional retail uses,” says
Most of these retailers have historically preferred freestanding locations or locations in strip and power centers, but a unique combination of market forces had made this an opportune time for them to expand into regional malls, according to Jeff Green.
For one thing, there is space to be filled. Previously there were few opportunities for large space users to build up presences at malls. Now, the market has plenty of empty department stores to accommodate their needs, says
Power center tenants, meanwhile, have been concentrating on shrinking their average store sizes, a trend that has made it more challenging for them to find appropriate size boxes at more traditional locations, says
Prior to the recession,
As for the regional mall owners, bringing in stores normally associated with other retail formats helps them fight off competition from neighboring lifestyle and power centers, says Sokolov.
In the past, “the mall just didn't have the square footage to accommodate those users,” he says. “But as there was an increasing number of department store boxes that ceased to be, that opened up a new opportunity. Then, as those tenants opened in the malls, they found their stores were productive and that encouraged them to pursue more opportunities.”
Development outlook
Despite the sector's performance, don't expect to see much new development. Even prior to the current downturn, the U.S. mall market was near the point of saturation. During the 1970s, the heyday of the mall, U.S. developers delivered a total of 375 million square feet of new space. By contrast, in the 2000s, new mall deliveries fell 62 percent, to 144 million square feet, according to research from
While there might still be pockets of high-growth areas that might support a new regional or superregional mall in the future, any new mall projects will be approached with a great deal of caution, says Moore. To justify building a 1-million-square-foot (or greater) property, mall developers need a market with
Still, Moore expects a net decrease in the number of malls in the U.S. over the coming decade, as the industry redevelops or razes assets that prove to be unviable. Most mall owners are instead concentrating on redevelopment and renovation.
To capitalize on consumer's current preferences, they have been bringing in more full-service restaurants, movie theaters and other entertainment venues to their properties, as well as trying to maintain the malls' physical appeal. Simon, for example, has been working with
Forest City has been expanding play areas within its centers to make shopping easier for customers with kids. CBL has signed deals with more than 20 new restaurants over the past 12 months, according to Lebovitz.
“We are concentrating less on opening new centers and spending more effort and capital on improving existing assets,” says General Growth's Barocas. “In some cases, it might be a total remodel, in some cases it might be an expansion. And in some cases, based on the market, there could also be a reduction.”
After Westfield completed the redevelopment of its 1-million-square-foot Westfield Culver City in
Some owners have also started exploring bringing in non-retail uses such as health care and education facilities to the peripheries of their malls, to drive additional foot traffic. “I think the traditional four-anchor regional mall will disappear,” says Moore. “And the mall will cater instead to the trendy, interesting things the consumers want to do.”
That means that over the coming years the regional mall will largely retain its physical shape, but the collection of tenants within its walls will become a hybrid of the most successful components of all retail property types. In addition to visiting Victoria's Secret and the Gap and spending an hour or two at the multiplex, mall shoppers will be able to dine at a full-service restaurant, entertain their kids at a bowling alley, browse house wares at a big-box store and do their grocery-shopping in the course of a single trip under one roof.
“I think our industry is an industry that hasn't really changed in a long time in terms of thinking through the mall model and this economy has forced us to be creative,” says Coradino.
REGIONAL MALL TIMELINE
1920: | The Ratowczer (later Ratner) family emigrates to the U.S. and soon forms Forest City Material, which sells building material to contractors. |
1929: | Forest City Material begins retail operation. |
1939: | James W. Rouse forms the Rouse Co., which eventually becomes an enclosed mall developer and inventor of the festival marketplace concept. |
1940: | Forest City builds its first retail properties, a series of strip shopping centers. |
1944: | Edward DeBartolo Sr. forms the Edward J. DeBartolo Corp., which eventually becomes a pioneer and early leader in the development of the regional mall industry. |
1950: | The Taubman Co. is founded by A. Alfred Taubman as a retail development and construction firm. |
1950: | Forest City builds Shoregate Shopping Center in Willowick, Ohio. |
1950: | James P. Wilmot founds Wilmorite Properties Inc. |
1953: | Taubman builds its first shopping center — North Flint Plaza in Flint, Mich. |
1954: | The J.L. Hudson Co. builds Northland Center in Southfield, Mich. It is an open-air center anchored by a Hudson's with a ring of stores around it. In the 1970s, it is converted into an enclosed center and is expanded several times. |
1954: | The Bucksbaum brothers — Martin and Matthew — branch out from their family's grocery business by building Town and Country Center in Cedar Rapids, Iowa. |
1955: | Richard E. Jacobs and David H. Jacobs form the The Richard E. Jacobs Group in Cleveland. The firm goes on to build enclosed malls across the country. By 2000, the firm will own and manage more than 45 million square feet of retail space in 40 centers across the country. |
1956: | The first enclosed shopping mall, Southdale Center, opens in Edina, Minn. It has a two-level design, central air conditioning and heating, a common area and two department store anchors. |
1957: | The Outlets at Bergen Town Center, the oldest enclosed mall in New Jersey, opened in Paramus in late 1957 |
1958: | Harundale Mall, another early pioneer, opens in Glen Burnie, Md. Additional significant early regional mall projects include Big Town Mall (1959), in Mesquite, Texas, Chris-Town Mall (1961), in Phoenix, Arizona, and Randhurst Center (1962), in Mount Propect, Illinois. |
1959: | The Glimcher Co. is formed as a timber and building supply business. |
1960: | Forest City becomes a publicly-traded company. |
1960: | Melvin Simon & Associates is founded by Melvin, Herbert and Fred Simon. The firm opens an open-air shopping center that year. |
1960: | Pennsylvania REIT is founded as one of the first publicly held REITs in the U.S. |
1960: | Westfield Development Corp. begins life as a public company on the Sydney Stock Exchange. The company is formed by John Saunders and Frank Lowy. The two build a shopping center empire in Australia heavily influenced by the evolution of the concept that is taking place in the United States. |
1961: | Taubman breaks ground on its first large mall — the 350,000-square-foot Arborland project in Ann Arbor, Mich. The $5 million project is anchored by Montgomery Ward. |
1961: | Moses Lebovitz, Charles Lebovitz and Jay Solomon, principals of Independent Enterprises, start out developing shopping centers. |
1962: | Forest City opens its first enclosed regional mall — Boulevard Mall in Amherst, N.Y. |
1964: | The Bucksbaums become majority stockholders in General Management Corp. They exchange the stock for shares in a REIT called General Growth Properties and form General Growth Cos. to plan, develop and manage the REIT's assets. |
1964: | Melvin Simon & Associates opens its first regional mall, the University Mall in Fort Collins, Colo. Mean while, Taubman opens Southland, the first enclosed mall in northern California. |
1964: | Mace Siegal and Richard Cohen form MaceRich Real Estate Co. in Ames, Iowa. |
1964: | Bob Teske forms Westcor in Phoenix. The firm becomes a leading developer in the Southwest. It is now owned by Macerich but still has 18 properties. |
1970: | Independent Enterprises merges with Arlen Realty & Development Corporation, a New York public company with a large portfolio of shopping centers primarily located in the eastern half of the United States. |
1971: | Rouse opens a food court at Plymouth Meeting Mall, which ultimately fails reportedly because it was “deemed too small and insufficiently varied.” |
1971: | Taubman opens Woodfield Mall in Schaumburg, Ill. At its opening it contains 59 stores, which eventually grow to 189 stores and 1.9 million square feet two years later, making it the largest mall in the country at the time. Today, it contains 2.7 million square feet of space. It remains one of the 10 largest malls in the nation. |
1972: | General Growth is listed on the New York Stock Exchange. |
1974: | Rouse opens what is believed to be the first successful regional mall food court at Paramus Park in Paramus, N.M. |
1976: | Rouse develops Faneuil Hall Marketplace — the first of its “festival marketplaces” to be built. |
1977: | Charles Lebovitz becomes the president of Arlen Realty & Development's shopping center division. |
1977: | Westfield Group makes its first U.S. acquisition when it buys the Trumbull Shopping Park in Trumbull, Conn., for $21 million. The company repositioned the property and improved it over many years. By 2009 it estimated the center to be worth $233 million. |
1978: | Charles Lebovitz and five associates form CBL & Associates, Inc. to develop regional malls and community centers. The newly formed company developed its first shopping mall, Plaza del Sol, in Del Rio, Texas, which opened in March 1979. |
1980: | Westfield acquires three new centers in the U.S. |
1982: | Wilmorite opens The Marketplace Mall in Rochester, N.Y. — the first for the company that contains more than one million square feet of space. |
1984: | General Growth sells 19 malls for $800 million to Equitable. At the time, it is the largest single real estate transaction in U.S. history. General Growth liquidates the REIT and General Growth Management Inc. continues on as a third-party management business. |
1984: | Westfield co-founder John Saunders sells his shares to Lowy. He remains on Westfield's board, but retires from active duties three years later. |
1986: | Westfield acquires three malls from Macy's, including the massive Garden State Plaze in N.J., putting it firmly on the map as a player in the U.S. market. |
1986: | The Glimcher Co. opens its first regional mall, Indian Mound Mall in Newark, Ohio. |
1987: | Forest City sells its retail building materials business to Handy Andy. |
1987: | Westfield establishes its U.S. headquarters in West Los Angeles. |
1989: | General Growth buys The Center Cos., making it the fourth largest owner of malls in the country. With its third-party business, it is the second largest manager of malls in the nation. |
1990: | Robert S. Taubman becomes president and CEO of Taubman Centers. In 2001, he becomes chairman as well. |
1992: | The $650 million Mall of America opens in Bloomington, Minn. The property, developed by Melvin Simon & Associates and Triple Five Group, contains 4.2 million square feet of space, but only 2.5 million square feet is devoted to retail. Despite being larger than other malls, it contains less retail square footage than several other centers. Regardless, it is considered the most visited shopping center in the world. |
1992: | Taubman Centers begins trading on the New York Stock Exchange. |
1993: | Simon Property Group is formed from an IPO in December. It is the largest REIT IPO in U.S. history to date. |
1993: | General Growth goes public for a second time. At the time, it owns just 21 malls while managing 75. |
1993: | CBL becomes a REIT named CBL & Associates Properties and is listed on the New York Stock exchange. |
1994: | Herbert Glimcher takes Glimcher Realty Trust public in an IPO. At the time it owns a mix of regional malls, community centers and single-tenant properties. |
1994: | MaceRich goes public as the The Macerich Co. |
1994: | General Growth and Westfield Holdings team up to acquire CenterMark Properties in a $1 billion deal. The deal triples the size of Westfield's U.S. portfolio. |
1995: | David Simon becomes president and CEO of Simon Property Group. Melvin and Herbert Simon become co-chairman. |
1995: | General Growth sells its interests in the Centermark portfolio to Westfield. In turn, it teams with four partners to acquire Homart Development Co. from Sears, Roebuck and Co. in a $1.85 billion deal. |
1996: | Simon merges with Debartolo Realty Corp. in a deal worth $3 billion. The company is re-christened as Simon Debartolo Group and has a portfolio of more than 110 million square feet. |
1996: | General Growth acquires General Growth Management to integrate its ownership and management arms into a single entity. |
1996: | Westfield America Trust is listed on the Australian Stock Exchange. The next year, the entity is also listed on the New York Stock Exchange. |
1997: | PREIT merges with the Rubin Organization and converts to an UPREIT. Ronald Rubin is named PREIT's CEO. |
1998. | Simon acquires Corporate Property Investors for $5.8 billion and the company goes back to the name Simon Property Group. After the deal, the firm's portfolio contains 175 million square feet of space. |
1998: | Westfield acquires a portfolio of 12 malls from TrizecHahn for $1.4 billion. The company also rebrands every center it owns in the U.S. with the Westfield name. |
1999: | John Bucksbaum succeeds his father Matthew Bucksbaum as General Growth CEO. |
2001: | CBL acquires 23 properties from The Richard E. Jacobs Group, the largest single acquisition in the company's history. |
2001: | PREIT founder and chairman Sylvan Cohen passes away. CEO Ronald Rubin takes over as chairman. |
2002: | Simon, Westfield and The Rouse Co. acquire the real estate assets of Rodamco North America N.V. General Growth had been trying to acquire the firm. General Growth goes in to acquire JP Realty for $5.3 billion later in the year. |
2002: | Macerich acquires Westcor for $1.5 billion. |
2003: | PREIT decides to focus on the retail sector. It acquires six malls from Rouse and 26 other retail assets while selling all its multifamily properties. |
2004: | General Growth Properties acquires The Rouse Co. in a $12.6 billion deal — the largest ever in the retail real estate industry. However, the firm takes on a lot of debt in the process, which eventually forces it to file for Chapter 11 bankruptcy protection. |
2004: | Macerich acquires Wilmorite Properties in a $2.3 billion deal. |
2004: | Westfield merges Westfield Holdings, Westfield Trust and Westfield America Trust into a single entity called Westfield Group. As a result, it no longer has shares traded in the U.S. |
2006: | The Mall at Turtle Creek becomes the last new enclosed mall to open in the United States. |
2008: | As concerns mount about the firm, John Bucksbaum steps down as General Growth CEO. |
2009: | Encumbered with about $27 billion in debt, General Growth files for Chapter 11 bankruptcy protection and enters a lengthy reorganization process. |
2010: | After a 19-month reorganization, General Growth emerges from bankruptcy. It splits some of its riskier assets into a new firm, the Howard Hughes Corp. The firm also successfully fights of takeover attempts by Simon Property Group while it reorganizes. |
THE PROTOTYPE
The 1.3-million-square-foot Southdale Center in
Department store operator
Today,
LAST OFF THE ASSEMBLY LINE
The mall contains 800,000 square feet of retail space and is located in
Its anchors, in addition to
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