Created by Barry Rosenberg on June 20, 2011
For an industry that has taken its lumps over the past few years, the first signs of a retail recovery are welcome news. There was an optimistic buzz at the annual Las Vegas RECon convention in May that had been missing the last couple of years. But I think there’s a bigger story here. What’s going on is not so much a traditional recovery as it is a rebalancing; less a return to expansion than a move to refocus. There is still too much square footage out there, and the process of consolidation is highlighting the contrast between the “haves” and the “have nots.” We are already seeing a widening gap between quality retail opportunities and mediocre projects as cautious retailers prioritize a relatively small handful of high-performing malls and select locations. In the evolving mallscape of 2012 and beyond, great spaces and places will be at a premium, and the implications for retailers and developers alike will be profound.
It’s not just post-recession fallout driving this trend. Online sales continue to rise, nibbling away a larger chunk of the overall bottom line and decreasing the demand for brick-and-mortar locations. Retailers are also looking overseas, which means that U.S. malls are now competing with overseas allocations. For Class A properties, this Darwinian dynamic only reinforces their standing. Class B malls will be vulnerable if not well-managed, and most Class C malls are going to have to reinvent themselves or almost certainly go extinct. We are already seeing a move away from third- and fourth-tier markets, as well. Markets like Lancaster, Ohio, for example, might still make sense for tenants like Target and JC Penney, but the majority of in-line retailers will likely take a pass; calculating (correctly) that many consumers will make the drive to nearby Columbus.
Retailers are not only looking at focusing on the best markets, but with fewer stores in each market, they are also prioritizing the best real estate. If Gap goes from 5 stores to 3 in a market like Columbus, for example, they are going to be in a position to pick and choose the strongest locations. Sales under $300 per-square-foot (when the average mall is $340) will not cut it for most retailers. Needless to say, this doesn’t bode well for the approximately 500 unanchored lifestyle projects that were built in the last decade.
You don’t need a crystal ball to identify this trend–it’s already happening. At the same time that familiar names like Simon Property Group, General Growth Properties (GGP) and Westfield Group are all looking to reinvest in their top tier centers, they are actively looking to sell their bottom performing centers. Per a recent Morgan Stanley report, of the 500 Class C malls, at least 250 of them will become nonexistent as retail centers within the next 5 to 10 years. That will remove roughly 250 million square feet of retail from the market place. The shutdown of these malls will create select opportunities for some new centers with better locations and better designs. But many old centers will not be replaced; the sales will transfer to the more dominant regional destination centers. For a healthy retail marketplace recovering from problematic overbuilding, this renewed focus on prime locations and quality developments is an inevitable and almost certainly positive development. We might find out in the very near future that truly, less is more.