Chain Stores Will Determine Which Properties Survive the Mall Apocalypse

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11,000.

That’s how many more retail doors could close in 2018, according to Cushman & Wakefield. That’s on top of the nearly 9,000 that shuttered last year.

And while all of those locations wouldn’t be mall based, with the precarious position of retailers like Neiman Marcus, Sears and The Bon-Ton Stores, there’s no doubt that malls are vulnerable.

But it’s not just the big guys that are raising questions about a potential mall apocalypse. Green Street’s Advisory Group said as ominous as it seems when the biggest players go dark, it’s actually the little guys—those occupying smaller individual footprints—that will have the biggest impact on how malls fare going forward. The reality is department stores pay little to no rent, either because they own their boxes or because they pay a pittance per square foot owing to their once strong drawing power. It’s the other mall stores that keep cash flowing.

In particular, Green Street’s Advisory Group has its eye on national mall chains, which typically comprise about 50 percent of the non-anchor space, with regional and local players making up the rest.

“It’s hard to assess what real estate is worth in the retail sector today. In-line tenant activity can provide a window into individual mall health,” Green Street’s Advisory Group noted in a new white paper that analyzed tenant turnover in 2017. “Understanding which malls are most at risk in a timely fashion is key to anticipating possible ‘death spirals,’ where malls can lose as much as 90 percent of their value.”

By tracking the roughly 300 national mall tenants that have at least 50 locations nationwide, the firm found that malls may be in more trouble than many may realize.

“While half of the top 25 net closing retailers have publicly announced store closures, the other half are closing relatively quietly and thus present significant risk to the sector,” the Advisory Group stated.

So, for every BCBG, Aeropostale and Gymboree in the press for shuttering locations, there’s a Stride Rite, Claire’s and Men’s Warehouse that’s managed to keep their activities on a lower profile.

In the face of this industry-wide contraction, mall executives were resourceful last year, redeveloping department store boxes to create spaces that drive more traffic and revenue, capturing online players looking to set down roots offline and chasing tenants beyond the retail sector. But even with an assist from companies like L Brands, H&M Group and Sycamore Partners that are expanding their physical presence, there may be a limit to property owners’ ability to keep up.

“The obvious issue is that, while there are new emerging brands who are expanding their brick-and-mortar locations within malls, they are being more discerning about mall quality and ownership, and they are opening stores at a slower pace than seen in the past from successful retailers,” the Advisory Group stated.

Overall, the firm found that about 70 percent of malls have seen a drop in the number of national tenants. And A malls haven’t been immune. As chains like The Limited exit brick and mortar, even the best properties are left with vacancies to fill. Their challenge is a lot easier than lower grade malls however. For instance, 82 percent of C and D grade malls have had felt negative effects from tenant changes with only 10 percent reporting being affected positively. That’s compared to the 65 percent A malls that report negative changes and the 30 percent that have seen a positive change.

“Most top-quality centers already have more of the national retailers as tenants, limiting their ability to find other national tenants to replace those that leave,” the Advisory Group said. “Conversely, many lower-quality centers are seeing significant changes in their ability to retain and attract national retailers despite already housing fewer national retailers on average than ‘A’ malls.”

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