Retailers are anticipating a strong holiday season, boosted by a healthy economy and burgeoning consumer confidence, but an intensifying slump among shopping mall operators shows not all are benefiting from the recovery.
Mall vacancy rates rose to 9.1% in the third quarter, their highest level in seven years. Many of the older shopping centers that lack trendy retailers, lively restaurants, or other forms of popular entertainment continue to lose tenants, or even close down.
Much of the retail sector has bounced back this year after years of losing out to online competitors that have decimated some of the industry’s biggest names, including department stores like Macy’s and retailers like Payless ShoeSource.
But in 2018, shares of retail stocks are enjoying their biggest rally in years, boosted by better-than-expected earnings and a nationwide shopping spree for everything from electronics to apparel.
Robust job growth and a solid economic outlook have pried open wallets. Consumer confidence hit an 18-year high last month, while the Dow Jones Industrial Average set another record Wednesday. Wages were already starting to tick higher when Amazon.com Inc. announced this week it was raising its minimum wage to $15 an hour, a move that could put more pressure on other big employers to boost pay.
That momentum now looks poised to carry into the crucial holiday shopping season, which begins next month. The National Retail Federation on Wednesday said it expects holiday retail sales in November and December to increase by 4.3% to 4.8% over last year. The forecast, which excludes cars, gasoline and restaurants, compares with an average annual increase of 3.9% over the past five years, the NRF said.
But many lower-end malls are still struggling to benefit from the economic revival, especially in some of the more economically depressed areas in Pennsylvania, Ohio and Michigan. They suffer from a glut of shopping centers but not enough consumers.
The average rent for malls fell 0.3% to $43.25 a square foot in the third quarter, down from $43.36 in the second quarter, according to data from real-estate research firm Reis Inc. The last time rents slid on a quarter-over-quarter basis was in 2011.
“The enclosed mall has been bearing the brunt of this consolidation over the past 24 months, which has resulted in higher vacancies,” said Thomas Dobrowski, executive managing director at NKF Capital Markets.
Department store closings by Bon-Ton Stores Inc. and Sears Holdings Corp in the third quarter accounted for much of the jump in the vacancy rate, said Reis, though a number of owner-occupied Sears stores were excluded from the numbers, since they don’t have leases.
Many mall operators have lost more than one department store anchor, including the Susquehanna Valley Mall in Synder County, PA, which suffered reduced foot traffic after J.C. Penney and Sears closed. In Rapid City, S.D., store vacancies shot up at the Rushmore Mall after Sears and Herberger’s shut their doors.
“Any mall that is worried about a Sears or Macy’s closing has bigger issues,” said Alexander Goldfarb, a senior analyst at Sandler O’Neill + Partners L.P.
Not all shopping centers are under pressure. Malls in wealthier neighborhoods with less competition still attract shoppers and continue to fill space. Some landlords are holding on by bringing in more restaurants, discount retailers, entertainment and service-oriented tenants such as theaters, trampoline parks, and health care centers.
Some developers are even betting that malls offering new experiences or the right retail mix can still thrive, especially outlet malls offering popular brand names at a discount. This fall in Staten Island, N.Y., BFC Partners is preparing to open Empire Outlets, an outlet mall with 350,000 square feet of retail space and names like Brooks Brothers and Nordstrom Rack.
Canadian developer Triple Five Worldwide Group of Cos. is building American Dream Miami, a $4 billion project that would be the largest—and most expensive—mall in the U.S. The Florida project includes a 6.2 million square-foot complex with 2,000 hotel rooms, indoor ski slopes and a water park featuring submarine rides.
Dying malls haven’t crimped all retailers. Many are scrutinizing their bricks-and-mortar footprint and investing more to develop their online presence to cater to a wider pool of shoppers who use different channels.
In the second quarter, e-commerce sales accounted for 9.6% of total retail sales after adjusting for seasonal variations, up from 9.5% in the previous quarter, according to data from the U.S. Census Bureau.
As more sales shift online, many retailers “are growing their business nicely, but they don’t need as many stores to do it,” said Steve Sadove, an investor and former chief executive of Saks Fifth Avenue.
Marla Beck, chief executive of Bluemercury, a 175-store beauty product and spa chain owned by Macy’s Inc., said that while having locations in the best malls is still important to attract shoppers, there are plenty of other ways to reach them. “In the 20 years I’ve been in retail I haven’t seen this many anchors close,” Ms. Beck said.
Source: The Wall Street Journal, October 4, 2018 | Esther Fung