May 18, 2014

Malls struggling to attract consumers

Once stomping grounds for socializing teens and serious shoppers alike, many malls are deteriorating relics of the 20th century.

Once stomping grounds for socializing teens and serious shoppers alike, many malls are deteriorating relics of the 20th century.

Yellow liquidation sale signs, waterless fountains and empty hallways are representative of the trajectory trend malls are seeing.

Closings are expected to hit 50 percent within 15 to 20 years, adding to the billion square feet of already vacant space, retail analyst Howard Davidowitz said.

The original model for the shopping mall, a colossal structure with big-box retailers as anchors, no longer attracts shoppers.

Instead, consumers are looking for established town centers or downtown areas – if they’re not shopping from their phones or laptops.

Developers are satiating consumers’ wants by building artificial downtowns as an alternative to the traditional mall.

In the 1950s, commercial developers aggressively reached out to the new class of suburbanites with strong buying power, creating one-stop centers for maximum convenience.

By the 1960s, the retail industry brought money from major cities into suburban markets, displaying a large shift in retail that peaked in the 1990s and early 2000s. Now there are more than 200 U.S. malls and shopping centers with at least 250,000 rentable square feet, according to real estate information company CoStar Group.

“The typical U.S. mall, unless it is completely reinvented, will be a historical anachronism – a 60-year aberration that no longer meets the public’s needs, the retailers’ needs, or the community’s needs,” Rick Caruso, the CEO of real estate company Caruso Affiliated, told the audience at the National Retail Federation’s annual convention in January.

For Simon Property Group, the open-air model, with its downtown vibe, has been profitable. Simon’s outdoor centers incorporate mixed-use development, from high-end retailers and restaurants to office, apartment and hotel space.

Revenue for Simon, the nation’s largest mall operator, has grown in the past four years; the company also built five new outdoor malls in 2013, two in the U.S.

Simon also owns traditional indoor malls – including Towne East and Towne West Square in Wichita.

But retail spaces are competing not only with trends in outdoor spaces, but also virtual spaces.

From the couch

In the technology market, applications and subscription services such as Style for Hire and Bombfell offer the feel of a personal shopper without having to leave the couch.

The online component of shopping not only changes the market for consumers, but also takes away business from traditional retailers, McAvey said.

E-commerce giant Inc., for example, had a 21.9 percent increase in net sales in 2013.

Big-box retailers are most vulnerable to online shopping because consumers can find the commodity item they need at a lower price than in-store, likely accounting for store closures, McAvey said.

While malls saw almost a 50 percent decrease in foot traffic during the 2013 holiday season, according to the Wall Street Journal, online retailers don’t share the same concerns.

Online purchases constituted 5.8 percent of U.S. retail sales in 2013, nearly tripling from 2004, according to the U.S. Census Bureau.

Large indoor shopping areas rely heavily on department stores, but big-box retailers can’t anchor malls as they did in the past when they’re competing against online prices and convenience.

Department stores aren’t the only retailers struggling.

The teen market in brick-and-mortar locations is declining as online-focused retailers such as Brandy Melville and Shopbop become more prevalent, said Ki Bin Kim, director of U.S. real-estate investment trust equity research at SunTrust Robinson Humphrey.

“In our view, teens didn’t suddenly stop shopping; they are simply spending a significant portion online at very well-run online fashion retailers,” he said.

Teen retailer Abercrombie & Fitch Co. said it expects to close 60 to 70 stores in the U.S. during the fiscal year through lease expirations.

Other stores targeted to teens such as American Eagle Outfitters and Aeropostale have seen store closings and deep sales declines.

Aeropostale’s shares have tumbled 70 percent in the past year, and the unprofitable company plans to close 175 stores within the next few years.

Teen-focused retailers haven’t been able to compete with the rising popularity of stores like H&M and Forever 21, where shoppers can purchase a dress for $15 or a sweater for $8.

“We’re seeing so many people buy through multi-channel shopping,” where teens can purchase everything in one place, including mainstream adult brands, McAvey said.

Looking for a draw

All these trends leave malls weaker. Attractions like ice rinks and indoor roller coasters aren’t attracting consumers anymore, and niche stores and food courts are dying.

Even movie theaters haven’t been able to bring in consumers.

The declining foot traffic accounts for the disintegration of the food court model, now replaced by restaurants in many malls. Food court staples Sbarro and Quiznos filed for bankruptcy in March.

“There’s far more array of food choices at most malls, and you’re seeing places encouraging experiences: spin, hair salon and spas, massage and health-oriented places,” McAvey said.

Mall owners are turning to restaurants because that is something the Internet can’t do, said Stephen Lebovitz, president and CEO of CBL & Associates, a real estate investment trust.

They also are investing more money into healthy malls to increase the shopping experience.

At the Westfield Garden State Plaza shopping center in Paramus, N.J., the developers opened a $160 million wing dubbed the Fashion District that features more than 20 new luxury stores.

The renovation is much more modern than the rest of the mall and has tall windows to let light flood in, said Lisa Herrmann, the mall’s senior director of marketing.

Westfield Garden State Plaza generates a little under $1 billion in sales annually, or about $430 per square foot.

A strong indicator for distress is the amount of money brought in per square foot. Higher-quality malls will take in at least $400 per square foot, while a decent B-class mall will yield about $350 a square foot. Any time a mall’s sales fall below $300 per square foot, it’s likely in very serious trouble, retail specialist Gerard Mason said.

The average distressed or closed mall was built in 1983 and has a vacancy rate of 50.6 percent, according to CoStar data.

Those vacancies make up approximately 1 billion square feet of vacant retail space, according to Edward McMahon, chair for sustainable development at the Urban Land Institute.

“Over the last 20 years, we have built retail space five times faster than sales,” he said.

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