Why US malls Are Disappearing Do you Known
Shopping malls in the U.S. were once known for their massive department stores,endless fast-food courts, it as a Friday night hangout for teens. But with the rise of online retailers and thedemise of the department store, it is a challenging time to be a mall owner. In November 2020, two mall owners, CBL & Associates andPennsylvania Real Estate Investment Trust, filed for Chapter 11 bankruptcy protection afterfacing increased pressure due to Covid-19.
And according to a 2020 study, 25 percent of U.S. malls are expected to close permanently within the nextfive years. I think Covid really accelerated trends that were alreadyat play prior to the pandemic. It was retailers closing stores, retail bankruptcies. Retailers were looking for ways to renegotiate leases orpay less in rent. There are going to be malls that fail and they're goingto be vacant spaces. What happens to them into the future? I just know in the Syracuse area we have one and thecounty just purchased it.
I don't know what the plans are, but it's a lot — a lotof empty space and a lot of parking spaces sitting there doing nothing. Prior to Covid-19, with consumerscraving experiences over traditional brick-and-mortar retail shopping, malls were forced to pivot, offeringeverything from fine dining to indoor ski slopes. But the pandemic has exacerbated the challenges at mallsas social distancing has placed restrictions on stores, movie theaters and restaurants. You will see more malls closed. You'll see more shopping centers closed. But what you'll see is the winners continue to emerge. Malls are also a huge tax driver for the communities theyserve and employ a lot of people locally. So what will become of malls in America after thepandemic ends Malls in the U.S. took root at the end of World War II,alongside the growth of the suburbs. In the 1950s, a booming economy helped a large segment ofthe population increase their prosperity, allowing many Americans to purchase a new home and car. Aided by a series of government initiatives, like theVeterans Administration Home Loan Program and the Federal Aid Highway Act of 1956, a significant slice of thecountry was turning their back on cities and heading to the suburbs. Austrian born architect Victor Gruen, the man who manycredit with later helping to provide those newly minted suburbanites with a place to mingle and shop, saw anopportunity. Gruen emigrated to the U.S. following Germany's 1938 annexation of Austria. Once in the U.S.,
he established himself in the world ofshop design by refurbishing retailers, including at least one store on New York's Fifth Avenue. In 1954, Greun's design of the Northland Center outsideof Detroit, Michigan, debuted, making it one of the largest open air shopping facilities in theU.S. But Gruen, opposed to the country's growing reliance onthe automobile, wanted to create an atmosphere similar to his native Vienna — one of streets sprinkled with cafes,restaurants and commerce. In 1956, his design of a Southdale shopping center openedin Edina, Minnesota. The fully enclosed mall had a two-level design featuring 72 stores and anchored by two major department stores. The space also had 5,000 parking spaces andcentral air conditioning.
The modern mall was born. You'd load up in a station wagon and you drive to themall and everybody in the family would get that one thing they needed while the family was there. More than 40,000 people attended Southdale's opening day.
Why The venue was largely considered a success-
The venue was largely considered a success and was soonreplicated across the country. By 1960, there were 4,500 large shopping centers in theU.S. By 1987, malls and shopping complexes accounted for over50 percent of all U.S. retail sales. And they were becoming part of pop culture too, used asa backdrop for movies like Back to the Future, Mallrats and Terminator 2. And even as a springboard for musical acts. And malls were getting bigger. In 1992, the Mall of America, the largest mall in theU.S., opened adding attractions like roller coasters and an aquarium.
But the explosion of new construction was beginning toweigh on some locations. From about 1975 to 2016, retail space capacity in many cases in malls multiplied by four times the rate ofpopulation growth in the United States. So in 2016, every single person inthe United States had 24.6 or so square feet of retail space that could just betheirs. The rise of big box stores like Walmart,
discountretailers like HomeGoods, and the transition to e-commerce weighed on malls too. This has been the narrative for years now that we reallygot to a point where we're overbuilt. We have too much retail space in the country. Now that retailers are growing more of their businessonline, inevitably, that means, you know, they don't need as many stores. So we've seen those store closures. By 2017, there were roughly 1,200 indoor shopping mallsin the U.S.
And yet if you look at retail pre and post the creditcrisis, before the credit crisis, people used to walk around in T-shirts that say "I way overpaid for this tshirt." Suddenly after the credit crisis, they were all going for these things - phones -spendingthousands of dollars on a phone that they used to get for free. So the point is that people change their shoppinghabits. And what needed to happen for the malls is that theyneeded to evolve as well. According to a 2020 IBISWorld Industry report, theshopping mall management industry in the U.S. is an $18.3 billion business and includes companies likeSimon Property Group, Brookfield Property Partners and Macerich. In general, landlords like Simon make their money fromrental income and property management fees. Of the roughly 1,100 malls in the U.S., about 250 areconsidered class A malls, the top performers that bring in the most sales per squarefoot. About 380 are considered B malls. A little more than 300 are categorized as C malls. And the remainder are D quality or lower, that could beon their way out of existence. Like a number of their retail tenants, the coronaviruspandemic has had a devastating impact on U.S. malls. CBL Associates has a portfolio of about 100properties across 26 states, including a number of B and C rated malls.
The company said with tenants not paying rent in othersdelaying payment, it was forced to file for Chapter 11 bankruptcy protection in November 2020. Pennsylvania Real Estate Investment Trust, which owns andoperates over 22 million square feet of retail space in the eastern half of the U.S., filed for bankruptcyprotection that same day. Simon Property Group, the biggest mall owner in thecountry and the largest operator of A rated malls, including the King of Prussia in Pennsylvania andRoosevelt Field in New York, also saw a steep drop in revenue after some retailers skipped out on rentpayments. In the fourth quarter of 2020, the company had totalrevenue of $1.1 billion, down 24 percent from the previous year.
But a healthy balance sheet and a portfolio of desirablelocations helped Simon fight back. Retailers deemed non-essential — their stores were forcedto shut, and a lot of retailers thought, "OK, well, I can't pay rent or I'm not going to pay rentif I'm not operating this store." And so these mall owners like Simon, like Macerich, theystill have obligations on their ends to meet. They have bills to pay. They have loans that, you know, are potentially maturingsoon and debts to pay off. And it really became a problem as retailers like The Gapsaid, you know, "we're not going to pay rent or we can't pay rent right now." In June 2020, Simon Property Group sued one of itsbiggest tenants, apparel retailer, Gap, for failing to pay more than $65 million in rent and other charges. The company also went on the offensive, buyingdistressed and struggling retailers. In February, 2020 Simon apparel licensing firm,Authentic Brands, and fellow mall owner, Brookfield, acquired Forever 21 out of bankruptcy for about $81million. In August 2020, Simon and Authentic Brands bought men'ssuit maker, Brooks Brothers, out of bankruptcy for $325 million. In that same month, the pair acquired denim maker, Luckybrand, for $140 million.
And in December 2020, the company partnered with Brookfield again topurchase J.C. Penney out of bankruptcy for an estimated $800 milliondollars. And some place a big bet on the future of luxury malls, too. In December 2020, the company acquired an 80 percentinterest in rival high-end mall owner, Taubman Center. Taubman owns two dozen malls, including a handful inAsia that have stores like Tiffany, Gucci and Prada. But unfortunately, there are a lot of centers that don'tfit that high profile and that have lost their competitive edge. The thing about Simon is they've beenreally focused on maintaining it, and that's both been through a combination of culling the lower productivecenters, as well as making sure that they keep investing in their top centers to ensure that thosecenters remain dominant in their respective trade areas. While malls in the U.S. were struggling and shutting downprior to Covid-19, according to an August 2020 report by Coresight Research, the pandemic has accelerated thattrend. The research group said that an estimated 25 percent ofU.S. malls could close over the next three to five years. Some experts think that number could go even higher.
Why US malls Are Disappearing-
I think everyone agrees that we will get to a point wherethere are fewer malls in America. You know, some experts have pegged that we have roughly1,100 malls today. Maybe we only need 25 percent of those. We're already seeing it's fascinating the, you know, thestrong are getting stronger and their vacancy rate, as you know, is very low, single digit. And the reason for that is because the tenants arerealizing where the traffic is and they are leaving their traditional, let's justsay, mall locations and moving into, you know, stronger malls, whether it be A, A plus. And according to analysts, the locations likely tosurvive are those well capitalized A rated malls that offer more than your traditional shopping experience. The Phipps Plaza Mall in Atlanta, run by Simon PropertyGroup, houses brands like Saks Fifth Avenue and Tiffany's. The mall is opening a Nobu Hotel andrestaurantand a 90,000 square foot lifetime athletic center. And a 13-story class A office building. The Northgate Mall in Seattle, also run by the group,has shops like Nordstrom Rack and has plans to launch an NHL Seattle corporate complex with three ice skatingrinks, 1,200 luxury multifamily residences and hotels. It's not just, hey we're a mall and all wedo is offer mall product, right? It's no, we're a retail center. We're a dominant part of the community.
How can we make sure we get more than our fair share ofthe commerce that's in that market? And that's why you see them branching into restaurants,adding things like hotels, self-storage, apartments, office, other uses to the mall. A lot of these malls, as they're finding new uses and away to repurpose them, it's going to be case by case. I think you have to go into the town. And that's what a lot of these mall owners are doingright now and seeing what the town needs. You know, is it a medical office building or a schoolpotentially or a church, more office space or maybe a new residential community? According to analysts, other ways malls could remainrelevant is by transitioning to essential services that provide steady cash flow and stable occupancy in areaslike health care and grocery stores. Last-mile fulfillment centers could be an option forsome, too. According to an August 2020 news report, mall owner SimonProperty Group was in talks with Amazon about potentially turning some of its former Sears and J.C. Penney locations into warehouses. A potential obstacle is the locations may need to bere-zoned by local governments for industrial use. And top performing malls have seen a glimmer of goodnews, too.
According to placer.ai, while mall visits in the bestperforming malls plummeted in the spring of 2020, they climbed over the summer and into the early fall. A December rebound to the mall was led by holidayshoppers. The issues facing the malls and retail really are nottenant driven, they're capital driven. Malls, like fashion, are very expensive. You know, you got to spend a lot to look good. And certainly when you look at malls, if you don't havethe capital to make sure that your facilities and your offering and just the buildingappeal isn't top tier, you start to lag and then that affects yourability to lease. And at some point it becomes sort of a downward spiral that's hard to get out of.