Thomas Lee: Large mall operators dramatically expand efforts to boost the fortunes of their tenants.
The responsibilities of a shopping mall owner seem fairly straightforward: keep the lights on, the floors clean, the hedges trimmed.
But as department store chains like Macy’s Inc. and Sears Holdings continue to close stores, large mall operators have dramatically expanded efforts to boost the fortunes of their tenants. Or at least to slow their demise.
Macy’s announced last week it will sell its store at the Stonestown Galleria in San Francisco to General Growth Properties, the mall’s owner, and then lease the location back from the firm. That will provide the troubled retailer — which last week detailed plans to close 68 stores and cut more than 10,000 jobs — with an immediate infusion of cash. Last September, Simon Property Group, another mall operator, and General Growth joined forces with a group of investment firms to purchase bankrupt apparel retailer Aeropostale for $243.3 million,
a move that will keep open 229 stores.
Besides trying to shore up stores’ finances, mall operators are helping their tenants improve e-commerce.
Menlo Park startup Deliv has partnered with large mall operators like Simon, Westfield, and General Growth to provide same-day delivery service for its retailers in major markets, including San Francisco, Chicago and Boston. These operators also acquired minority stakes in the startup.
Despite these moves, malls face a dire situation. Since the debut of the first indoor mall in Minnesota in 1956, their business model has depended on signing large department stores like Macy’s, Sears and JCPenney as anchor tenants. The lease payments from these retailers essentially paid for the property’s upkeep while smaller tenants added profits.
But over the past several years, the boom in e-commerce and the lack of compelling fashion have meant that fewer people are visiting department stores. Macy’s disclosed details of its 68 store closures — three of which have already happened — in the wake of a difficult holiday shopping season, though it had anticipated the closures in an announcement in August. Sears said last week it will shutter 150 stores. Neiman Marcus announced last week it was scrapping plans to go public. And it’s not just department stores: The Limited is shuttering all of its locations — some 250 stores — nationwide.
The problems are hitting mall operators hard. Since 2010, investors in commercial mortgage securities backed by malls have lost $2.88 billion, according to Morningstar Inc. Another $3.81 billion of these loans require special servicing, which means they are at risk of failing.
“Sears and Macy’s won’t survive in the long term,” said John McNellis, co-founder of McNellis Partners in Palo Alto, which specializes in developing supermarket-anchored shopping centers. “The day of the department store is over.”
However, that doesn’t mean malls can’t try to lengthen the life of these retailers. They can’t change their business models overnight because department stores still provide a big portion of revenues. But at the very least, malls can buy some time so they can restructure operations, change the tenant mix, and adapt better to ecommerce.
For example, Deliv offers retailers the prospect of same-day delivery. Under the arrangement, mall employees will pick up goods ordered online from various stores on the property and hand them off to on-demand drivers using Deliv’s software to coordinate deliveries. PetSmart and Best Buy are among the retailers using the service.
Malls recognize that the future of retail is matching online orders to inventory found in brick-and-mortar stores, said Deliv founder and CEO Daphne Carmeli.
“You need local fulfillment to meet consumer expectations” of sameday deliveries, Carmeli said. “Malls want to help retailers with this.”
The move by Simon and General Growth to rescue Aeropostale is unprecedented in that mall operators bought a tenant that was destined to be liquidated in bankruptcy. There is a big difference between renting space to a retailer versus actually owning one: Simon and General Growth specialize in real estate, not selling clothes to teenagers.
Another possible solution: renting out vacated space to online players like Amazon, Warby Parker and Bonobos. Internet-only retailers are also finding they need physical space to reach consumers, McNellis said.
Amazon, for example, plans to open pickup locations for its grocery business along with physical book stores. The online giant has previously operated pop-up stores at Westfield San Francisco Centre.
“They get a real pop if they open physical locations,” said McNellis, author of “Making It in Real Estate: Starting Out as a Developer.”
McNellis believes that mall operators will eventually have to adopt a mixed-use model in which they redevelop properties, especially in dense urban areas, into residential housing.
Macy’s, which owns some stores and leases others, appears to be exploring this strategy. Last November, it said it would partner with Brookfield Asset Management to redevelop land the chain owns, noting that Brookfield has experience in not only retail but also office, multifamily housing, industrial and hospitality spaces.
“We have real estate assets with significant value creation opportunities, and we believe that partnering with ... Brookfield is the best way to unlock the potential of those assets,” Macy’s CEO Terry Lundgren said in a statement at the time.
McNellis thinks companies like Simon and General Growth will ultimately need to “demall” because department stores aren’t coming back.
“They will have to depend on vastly less retail,” he said. “There are no replacement department stores.”