Unfolding retail real estate’s inescapable transformation
This is the final article in my series on present and future challenges the retail industry is facing, from both before and after the COVID-19 crisis. In the first article, Not Dead Yet: Understanding Consumer Behavior Is Key to Retail Survival, I discuss potential impacts that the pandemic could have on consumer behavior and how retailers will need to be prepared to adapt to these changing needs. In the second article, A Will to Live: How Omnichannel Can Rescue the Retail Property Industry, I review which retail real estate formats will struggle the most according to experts, and I examine the primary characteristics that landlords should seek out when looking to fill vacancies long term. I also go over both must-have and cutting edge technologies that retailers need for omnichannel shopping. Finally, in this article, I provide an overview of the sector and its outlook based on the latest research, how that affects brick and mortar in particular, and what technologies tenants need in place to navigate a post pandemic environment.
Could this be the end of the great American shopping mall? For the malls we knew, the ones with big box anchor stores, heavily dependent on nation-wide apparel chains, quite possibly, yes. These big box anchors throw around quite a bit of weight in their centers. Co-tenancy clauses for mall tenants often rely on the success of these big anchors, but in the current storm, many of them are being pummeled so deep beneath the ocean floor that the only chance for their properties’ survival may be to sever the chain to avoid being brought under. But with the anchor’s weight missing, the property is unstable and likely to tip.
Vince Tibone, senior analyst for retail at Green Street Advisors, explained how co-tenancy clauses can become a major problem for property owners if department stores continue to shut down, as he predicts they will. He said, “A lot of malls in the country will now be faced with two or more anchor vacancies, and that’s a very difficult place to come back from.” He continued, “You can trip co-tenancy clauses in a lot of your in-line tenant leases, which in general, a co-tenancy clause means a retailer’s able to go to a reduced rent in some form or fashion when there are multiple anchor vacancies.”
The timeline for all of this has been drastically sped up by the COVID-19 crisis making mass tenant rent abatements a real possibility. “We’ve been concerned about the department store industry for a while, so this is not new news that these operators are struggling, but I think what we’re going to see is a lot of disruption we were expecting over the next five to ten years being pulled forward to the next two years,” said Tibone. He then added, “We are now expecting about a little more than half of all mall-based department stores to close by the end of 2021.” Those numbers may seem startling, but the closings have already begun. Based on co-tenancy clauses, department stores closing plays a large role in the overall sector. “The knock on effect here is that it’s going to accelerate the demise of many malls,” said Tibone.
Manus Clancy is the senior managing director of applied data, research, and pricing at Trepp, a data modeling and analytics firm for commercial real estate markets. In a recent podcast, Clancy explained the implications of Neiman and Marcus filing for bankruptcy, Lord and Taylor’s liquidation, and Nordstrom’s decision to close sixteen of its stores. He said, “If you’re thinking that this is a V-shaped recovery, you’re not doing that. If you’re closing stores, you’re thinking this is a long slow slog, and you’re looking to cut costs and raise cash wherever you can.”
Clancy also discussed the status of retail loans based on some of May’s remittance (or payment) data from the CMBS (commercial backed mortgage securities) industry. In regards to retail’s CMBS, he said, “What we did see was a couple of single asset retail deals remit this week.” Clancy then explained, “Several of them, several hundred million dollar plus loans, posted to be on a watch list for the first time, with the comment being that the borrower had kicked off the process of requesting a forbearance.” He didn’t name the borrower to protect their identity, but stated, “However, it is a deep pocketed, major retail property owner, and if they’re being impacted by this, everybody will be.”
Forbearance requests aside, the other big player that could be the grim reaper for malls is Amazon, as discussed in the beginning of this retail series. In regards to Amazon’s announcement to spend $4 billion on COVID-related expenses presumably to protect its workers, Clancy believes they were really “throwing down the gauntlet to the [mall owners] Brookfield’s, the Simon’s, the Washington Prime’s, the Macerich’s of the world to say we are going to clean and clean and clean, and unless you do the same, and spend a lot of your dollars on cleaning your stores, we are going to lap you.” He added, “Nothing would make them happier than to see the entire demise of the shopping mall.”
Interestingly, Joe McBride, the head of commercial real estate finance at Trepp and contributor alongside Clancy, had a different take on Amazon’s news. McBride said, “Whether you clean your store or not, it doesn’t matter, because Grandma figured out how to shop on Amazon.” While McBride doesn’t think that everyone will prefer to shop online, he recognizes that we could see a shift in consumer behavior. He also discussed the possibility of Amazon expanding its distribution capabilities, suggesting that Bezos could potentially make an offer to Target, whose online sales have increased by around 250 percent this past quarter. However, he concluded, “I doubt that the federal government would allow it” due to antitrust laws.
New Anchors Yield Old Malls, or What They Were Once Meant to Be
But what big box mall anchors were instead converted to distribution centers? Malls are ideally located close to major suburban residential areas that often have little space to support a warehouse but have a significant need to meet delivery demands for online goods. Most anchor stores are already equipped with large capacity loading docks. Of course, the retail space would need to be converted, but back room storage and freight areas with high ceilings could suffice in the meantime. The majority of anchors should already be fitted for a distribution center’s network requirements, too. While this solution doesn’t necessarily help malls in terms of bringing traffic, it does create reliable income that properties may need to stay afloat while they secure new tenants and negotiate both old and new leases.
For the sake of argument, let’s assume that repurposing anchors into distribution centers could actually work. It leaves the question of how property owners ensure traffic for the rest of their tenants? Moreover, most malls have two or three anchors, not just one, so what do those properties do with additional big box vacancies? The answer to those questions could circle back to the original purpose of the mall when Victor Gruen conceptualized it back in 1956—a city-like hub where people can socialize and gather, not just shop. This is something Propmodo has been writing about well before COVID was on our radars. In Mall Metamorphosis, we explored how some newer mall concepts, like American Dream, are exceedingly experiential in nature, devoting more and more square footage to activities, attractions, and restaurants, not just stores.
When Sears closed a few years ago at a mall in Deptford, New Jersey, where I once worked, there were rumors that Dave and Busters, an arcade sports bar, might fill the spot. Instead, there are plans to subdivide the anchor space into Dick’s on the lower level and Round 1 Entertainment on the upper. Round 1 Entertainment offers activities like bowling and arcade games, which in a non-COVID world, attract the same type of demographics that most mall retailers want—younger families with parents established in the workforce, primarily composed of older millennials. Concepts that sell experiences, like ax-throwing or escape rooms, tend to draw in these millennials and help turn a mall, or even a strip center, into a place to gather.
Even before the pandemic, many malls were struggling to entice more foot traffic through their doors. If and when malls are permitted to accommodate higher densities of people, they need to be proactive about hosting promotional events or family activities. The mall in Deptford consistently hosted community events that generated large crowds. From bringing in former NFL players for signings to hosting children’s activities nearly every Saturday, this property understood its local demographic, curated events specifically for that demographic, and made sure events were widely publicized. These events often took place in an open space near the centrally located food court, but properties with vacant anchors could consider converting them into multi-use flex space, capable of holding more people, especially if those people need to be at least six feet apart. By subdividing levels of the anchor, properties can still collect rent from one or two tenants and use the remaining space to host events. Over time, a proven track record of elevated foot traffic will attract top tier tenants and could even be worth a premium.
Currently, however, increased foot traffic is a pipe dream as malls are beginning to reopen under strict social distancing guidelines that limit the amount of customers allowed inside. In the past, mall operators and their tenants equated more time spent on site to more dollars spent, but now, this extra time could prevent another customer from being able to enter and get what they need. Many retailers rely upon building relationships with their customers to grow individual sales, total transactions, and future business, all of which impact their bottom line and ability to pay rent.
This relationship-building process often requires extensive, up-close interactions between salespeople and customers. Imagine the sales associate struggling to balance a leaning tower of shoe boxes as they kneel down to guide your foot inside, only to carry them all back and bring out more when none of those styles work. Or picture the tailor, within your actual fitting room, pin in mouth as they measure, tuck, and pinch until the fit is just right. Envision a smartphone retailer where you’re shoulder to shoulder with the salesperson, learning to toggle between screens without a home button. While these scenarios may have been fairly common before the pandemic, such close contact won’t be acceptable now.
What’s more, these scenarios are not necessarily representative of ongoing macro retail trends. Even before the pandemic, customer trip lengths were often shorter as digital shopping trends increased. Now, customers may not want to expose themselves to unnecessary risks by spending additional time browsing. Regardless, until a vaccine is deployed to the masses, shopping may become more transactional and less personal. Retailers need to rethink sales tactics that require lengthy, intimate interactions. Instead, both tenants and property managers should rely on technology to compensate for what will inevitably be more limited, surface-level customer interactions.
Technology Equals Adaptability
As I explained in the second article in this series, omnichannel capabilities are now a necessity in order to maximize sales both digitally and in-store. Shopping channels continue to blur as technology advances to meet changing consumer needs, like the ability to easily and quickly find what they want. Brian Kilcourse, managing partner at Retail Systems Research and a thought leader in the world of omnichannel, recently stated, “Consumers have started to build their basket more frequently outside of the store, even when they fully intend to ring out their purchases within the store.”
Whether a customer is picking up something they paid for online or looking for the items that an app showed the store has, retailers need technology that makes these channels most efficient. Larger stores, like Walmart, often use geofencing and wayfinding to guide both customers and employees to products more quickly, coupling beacon technology with software to show product locations on digital store maps. Stores like Home Depot use mobile software that enables customers to scan products using their smartphones and instantly receive more detailed information about those items—an important service if interactions with salespeople are limited. Mobile apps can be built out to varying degrees depending on a retailer’s specifications, but it is one of the most important things to get right when developing an omnichannel strategy because it provides adaptability for customer assistance and trip length based on preferences and circumstances, which will be crucial for survival as properties begin to reopen in limited capacities.
In addition to the technology consumers use, retail properties and tenants need to ensure they have the proper technology in place to comply with density guidelines. While conversion counters can ensure properties follow social distancing recommendations, some malls or big box stores may consider using thermal technology to identify “hotspots” where people tend to congregate and then use that information to redirect traffic flow. Property management should also consider using both tenant engagement apps and customer engagement apps. For tenants, apps like Mallcomm can streamline communication and ensure property-wide initiatives, like traffic-driving events, are supported. There are also apps that offer tenants the option to join a digital customer reward program that builds a network of tenants to promote property loyalty. These apps can sometimes be used as payment methods, too, helping minimize contact at check out.
Experiential or multipurpose retail space could help resurrect the great American mall, but it is also betting on a future where there can be more than one person per fifty square feet. Many properties may be unwilling to gamble when faced with mounting debt, meaning those with the deepest of pockets will be the ones to survive. Transforming a dying shopping mall into a buzzing community hub, like Gruen envisioned way back when, is possible, but it relies on technology and a clear understanding of target demographics and consumer behavior. According to McBride, there’s a possibility that after months of confinement, people may be attracted to the idea of spending some leisure time outside of their homes. Even if they don’t actually need anything, McBride thinks people may “still want to go get a slice of pizza and walk around and see human beings.” He could very well be right.