Malls fight COVID-19 and store closings
Double whammy upends business model
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 including theaters still temporarily shut down due to COVID-19, anywhere from 1 in 4 malls to 1 in 2 could go out of business altogether, analysts projected.
“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 market share away from malls that were relying on diminishing foot traffic to apparel shops and department stores in particular.
“There are malls that 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, but we’re hoping it’s a minority.”
Analysts at Coresight Research, which tracks retail closures, projected that about 25% of America’s malls would disappear within the next three to five years.
But that could rise to as many as 50% “if we can’t stop the bleeding,” Coresight CEO Deborah Weinswig said in an interview. “That ends up changing the face of America.”
In general, analysts say that highend “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. But so-called “B” and “C” malls, which have lower-priced stores and more vacancies, are facing a high risk of closure.
“They’re trying to plug the holes in a dam,” Weinswig said.
Even malls that bet big on in-person experiences that were considered to be extremely resilient in the age of digital retail are suddenly experiencing nothing but 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.”
Mall occupancy rates hit their lowest level in at least a decade in the second quarter of 2020 at 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.
Retail tenants floundering
While some retailers have flourished during the pandemic, nearly all of them – such as Walmart, Target, Kroger and Home Depot – offered essential services of some kind, including groceries and home improvement goods. Few are typically located in malls.
On the other hand, department stores and apparel retailers, which dominate most malls, have been floundering. And many are already facing existential crises.
Recent Chapter 11 bankruptcy filings have included department store chains J.C. Penney and Neiman Marcus as well as 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
“They’re trying to plug the holes in a dam.”
Deborah Weinswig, CEO, Coresight Research
companies.
But their plans also include hundreds of store closures, including 242 planned by J.C. Penney alone, raising the prospect that malls throughout the country will be hollowed out in the coming months.
Retailers have already announced the closure of more than 80 million square feet of space so far in 2020, according to CoStar. That compared with 114 million for all of 2019, which had the liquidation of Payless ShoeSource, Gymboree and Charlotte Russe.
“Malls are going to certainly see a lot of those closures. And I think that mall owners are going to have to get creative in order to survive,” CoStar consultant Robin Trantham said.
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 erupted.
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.
“The COVID crisis has impacted them in a way that has deteriorated their business plan. I can agree with that for sure. But I don’t know that COVID was the cause of the issue to begin with,” Taubman said.
But he acknowledged that the pandemic will require malls to adapt their approach, especially because retail leasing is not expected to rebound quickly, even if a vaccine ultimately puts an end to the crisis.
“I think we’re seeing a higher rate of evolution right now than we have in the past and we’re going to have to move,” Taubman said. “But there are so many new tenants out there that are interested in space and interested in experiencing bricks and mortar and I don’t think that’s going to fade. I think it’s going to take a hiatus for a while because people don’t have the money right now.”
The challenges facing 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 drop out.
“The department store is just a format that does not work anymore,” said Chris Kuiper, a CFRA Research stock analyst who tracks mall companies. “People don’t want to wade through a four-story mega store to find a couple of items. So instead of these anchors being a traffic generator, they became an anchor in a literal sense, dragging down these malls.”
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 thus many of those operations have been shut down for months, with little promise of reopening soon amid an outbreak in such states as Texas, Arizona and Florida.
“That has unfortunately turned into a massive liability because those are the things that are going to stay closed,” Kuiper said. “So they’re really facing no good options at this point.”
The key question is whether the experiential model is finished or simply on hold.
Philadelphia resident Marta Rusek, 35, considers herself a lifelong mall shopper and before the pandemic was regularly going to the AMC movie theater at her local mall.
Now, Rusek, who works as a nonprofit organizer and has a compromised immune system, has no plans to return anytime soon. She even recently dreamed about going to a mall again but called it a “COVID-19 nightmare” because in the dream she accidentally left her mask at home.
“I’m not going to feel safe going into the theater or being around large crowds of people until the day those magic words that ‘there’s a vaccine available and it’s over’ are spoken,” Rusek said.
On that day, malls that had bet on food, entertainment, fitness centers and other services could zoom right back to the front of the pack.
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.”
Brown rejected the suggestion that Americans will stay away from mall restaurants, for example, after the pandemic.
“Dining at home is nice, but the food doesn’t arrive as hot, it’s not presented as well and somebody always has to do the dishes when you’re done,” Brown said. “So it’s not a substitute for dining out.”
Despite short-term difficulties for tenants such as fitness centers, which have been forced to shut down in many states, malls are still likely to move in that direction when this is over if only because of the pressure e-commerce continues to place on physical stores, CoStar’s Trantham said.
“While it may take a while for fitness centers and restaurants to expand at the same rate as they were before, we will still believe that they will recover eventually,” Trantham said.
In the long run, mall property owners may need to pivot once again, turning toward alternative options for their space, such as hotels, apartments, or online product fulfillment centers, analysts say.
They also need to invest in new ideas including areas within the mall where shoppers can pick up products that they bought online from retailers located inside the mall, analysts said.
However, many malls can’t make long-term plans right now. They’re too busy dealing with the present.
Malls come under pressure to provide rent relief
In many cases, retail tenants are requesting rent relief from mall property owners as they navigate the crisis. Nordstrom, J.C. Penney and The Cheesecake Factory are examples of retailers that have either failed to pay in full or are negotiating temporary rent reductions.
“They don’t have to close if the mall developers can figure out how to restructure their rents to make sense for their tenants,” Focus Brands executive Cole said, referring in general to retailers that are seeking a break.
Without rent relief, store closures could accelerate. That will undermine mall finances and place additional pressure on them because with additional vacancies, remaining tenants won’t want to pay full price for the space either, Saunders said.
“In the present environment, it’s going to be really difficult for the mall and property owners to fill those gaps,” Saunders said.
One alternative to rent relief might be for mall owners and retailers to join forces.
Mall owners Simon Property Group and Brookfield Property Partners are reportedly considering a joint bid to buy J.C. Penney in a strategy that mall companies have deployed with increasing frequency in recent years. In February, Simon was part of a group that agreed to buy fashion retailer Forever 21 out of bankruptcy, and in 2016, Simon was part of a group that bought fashion retailer Aéropostale out of bankruptcy.