Pandemic threatens weaker malls

Just when many shopping malls had finally figured out how to adapt to the era of digital retail, the coronavirus pandemic upended everything.

Having seen their recent move toward dining, entertainment, fitness and personal services come to a screeching halt — a pivot that was supposed to help them survive the Amazon age — malls throughout America are suddenly running out of time.

With J.C. Penney trying to avoid liquidation, smaller retailers closing or requesting rent relief, and venues such as theaters still temporarily shut down due to COVID-19, one-quarter to half of malls could go out of business, analysts project.

“The whole business model of a mall, which is about pulling in as many people as you can and getting them to stay for as long as you can, has just unraveled,” said Neil Saunders, managing director of consultancy Globaldata Retail.

The bleak turn of events has provided more fuel to online retailers already swiping customers from malls.

For some malls, “this crisis will accelerate their closure, no doubt,” said Kat Cole, president and chief operating officer of Focus Brands, parent company of mall classics such as Cinnabon and Auntie Anne’s. “How many is anybody’s guess.”

Analysts at Coresight Research, which tracks retail closures, projected that about 25% of America’s malls would disappear within five years.

That could rise to 50% “if we can’t stop the bleeding,” Coresight CEO Deborah Weinswig said in an interview. “That ends up changing the face of America.”

Although central Ohio shopping centers have reopened, they have limited capacity and have placed other restrictions on customers.

Analysts say high-end “A” malls are in the best shape because their luxury retail tenants have higher profit margins and thus are better able to withstand the downturn.

Even malls that bet big on in-person experiences that were considered to be extremely resilient in the age of digital retail are suddenly in pain.

“A lot of the things that malls have built-in — like gyms, movie theaters and restaurants, food service — are just not able to operate and pull in customers the way they once did,” Saunders said. “They’re either having to shut down or limit capacity, or customers are very reluctant to go there.”

Malls’ occupancy rate hit the lowest level in at least a decade in the second quarter of 2020: 94.4%, according to Costar Group, which tracks real estate.

Of the nation’s 1,793 enclosed shopping malls, nearly 500 “are at risk due to their location being poor” or “due to their dependence” on office workers or tourism for foot traffic, Costar senior consultant Kevin Cody said.

Retailers filing for bankruptcy

While some retailers have flourished during the pandemic, nearly all of those -- such as Walmart, Target, Kroger and Home Depot -- offered essential services of some kind. On the other hand, department stores and apparel retailers, which dominate most malls, have been floundering.

Recent Chapter 11 bankruptcy filings have included department store chains J.C. Penney and Neiman Marcus and apparel retailers Brooks Brothers and J. Crew. Those four have said they hope to use the restructuring process to cut debt and emerge as more sustainable companies.

Retailers have announced the closure of more than 80 million square feet of space this year, according to Costar. The total in all of 2019 was 114 million, including the liquidation of Payless ShoeSource, Gymboree and Charlotte Russe.

Bill Taubman, chief operating officer of Taubman Centers, one of the largest mall property owners in the country, pointed out that most of the retailers that have tumbled into bankruptcy in recent months had significant challenges before the pandemic.

For example, J.C. Penney, Neiman Marcus and J. Crew had billions of dollars in debt that weighed them down, placing them on watch-lists for Chapter 11. Sears had left most malls, including all its central Ohio mall locations.

The challenges for department stores, in particular, are especially problematic for malls – and not just because of the foot traffic they’re supposed to deliver. Many malls also have clauses in their leases that allow other, smaller tenants to leave if anchor tenants go.

“The department store is just a format that does not work anymore,” said Chris Kuiper, a CFRA Research stock analyst who tracks mall companies.

Experiential model fades

The great hope for malls was supposed to be a sharp pivot toward experiences and services. But in-person, indoor interaction is considered one of the riskiest activities during the pandemic, and many of those operations have been shut down or curtailed.

The AMC theater at Easton Town Center, for example, is closed, as are other indoor movie theaters in Ohio. At the Mall at Tuttle Crossing, the massive Scene75 indoor playground is now open on weekends, but at half its capacity.

During the pandemic, some malls have compensated by offering additional social-distancing experiences, such as outdoor movies at Easton and Polaris Fashion Place.

Michael Brown, a partner in the consumer practice of global strategy and management consultancy Kearney who has studied the future of retail, said the experiential model remains compelling for malls in the long run.

“We all believe that the COVID pandemic is temporary. We don’t know if it’s temporary for six, 12, 18 months or longer, but it is temporary,” Brown said.

“At some point in time, we will gather in public together to enjoy dining or entertainment or sports or recreation together. That’s why we say this is really just an accelerator. The strong will survive, but they will take a financial hit in the short term.”

Dispatch Reporter Jim Weiker contributed to this story.