The malls of yesterday are no longer the same. Perennial anchors such as Sears, Lord & Taylor and J. Crew are vanishing. The Q3 vacancy rate in enclosed regional malls jumped to 9.1%, the highest rate since Q4 2011, according to real estate research firm Reis in a study released Wednesday, October 4th. As one would expect, the rental rates have decreased as a result of lost stores. The Q3 average mall rent dipped 0.3% from Q2 to $43.25 per square foot, the first such decline Reis said it’s seen since 2011.
If one were to look at the statistics alone, it would appear that brick and mortar, especially mall tenants, would be doomed for sure. However, there is a rosy lining in all of this for foot-bound retailers. This retail Darwinism is separating the strong from the weak. The U.S. is still overstocked with higher per-capita shopping square footage than many other developed countries, and many so-called B, C and D class malls, in less desirable spots with non-stellar anchors will need to reinvent themselves or fold.
With that said, the top tier brick and mortar malls are being coveted for their innovative make-overs. The transformation is being made by adding a communal feel to upscale shopping, with hotels and apartments being placed strategically close to sales hubs. The idea is not new, but the lifestyle of living in an area where one can shop, dine and stroll is desirable to many. If you have been in one of these new life-centered environments, you will see that many brands that were born online are now shifting to this new retail space. Apple, Tesla and grocery stores like Wegmans, gyms, co-working spaces, movie theaters and restaurants like Shake Shack have increasingly become malls’ new traffic drivers. Not to mention the new retail Amazon locations. In the clothing area, you see the traditional J.C. Penny’s and Sears replaced by online startups Casper and UNTUCKit.
The workplace is also being folded into this concept. The nation’s largest owner of malls, Simon Property Group, is partnering with fitness chain Life Time, opening Life Time Work to include co-working space so people can exercise, work and shop. “Demand from tenants for space in our highly productive centers is increasing,” David Simon, Simon’s chairman and chief executive, said in the company’s most recent earnings call in July. No doubt that this notion is appealing to employers, who now have their workers as a somewhat captive audience, providing them what they need to stay happy and on task. Perhaps this is what the millennial will matriculate to once such spaces catch on.
The bulk of U.S. retail brick and mortar is located in strip malls and open air venues. For the first time since the Toys “R” Us store closings, this sector of the market has not fallen. Kimco Realty Corp. suggests it’s seeing “significant” interest from major retailers and off-priced furniture, fitness, specialty grocery, and arts and crafts retailers. The Reis survey suggests that the face of off-line retail is changing. Americans are clamoring for things like trampoline parks alongside gyms, furniture and houseware stores and grocery stores. The transformation of brick-and-mortar retail is far from over.