By the time the COVID-19 pandemic led to the temporary closure of nearly all retail, traffic at America's malls for years had already been steadily diminishing, sending vacancies up and rents down at many.
At 9.7%, the national mall vacancy rate — as measured in the first quarter by Moody's Analytics Reis — is the highest in a decade. Average mall rent in the period did rise 0.5% from the fourth quarter, to $44.08 per square foot. That's a 1.7% year-over-year increase, or 3.6%, cumulatively, over the last three years, according to Reis' report, which was emailed to Retail Dive. That's true in part, however, because in many areas, rent is propped up, not by thriving retailers, but by self storage or entertainment venues like trampoline parks that have taken over what once were retail spaces, the firm said.
The disease outbreak, then, has played havoc with an already tenuous situation. In order to promote social distancing, state and local governments in recent weeks have ordered nonessential stores to close, emptying mall parking areas of cars and corridors of shoppers. Now, as retailers and mall owners contemplate reopening, a new truth is settling in: Many won't stay open for long, or reopen at all.
"It's not a pretty picture for most malls in the country," according to Vince Tibone, a retail specialist at the property research group Green Street Advisors.
The new pressure
With no sales coming in, mall owners and their tenants have had to come to terms about rent payments, as have mom-and-pop stores on Main Street.
Several chains, including the brands at Gap Inc., L Brands, Urban Outfitters, Francesca's and others, simply let their landlords know that they wouldn't be paying rent, at least for April and in some cases beyond. Taubman, which is set to be acquired by Simon Property Group, attempted to play hardball and insist on payment.
But Ophir Sternberg, founder and CEO of Lionheart Capital and its Out of the Box Ventures subsidiary, which acquires distressed retail properties, took a different tack. For Out of the Box's more than 28 properties in 17 states, Sternberg asked tenants to just pay their share of maintenance costs and property taxes, in lieu of full April and May rent.
"That varies from property to property, but it amounts to an average discount of 60 percent to 70 percent of the full rent amount," he told Retail Dive in an email, adding that it is the right thing to do when a landlord's financial situation allows it. "If there is further relief on some of the other expenses, such as property taxes, we're committed to passing those on to the tenants, which will further lower their payments."
Such welcome relief can only go so far, however, in part because it's not clear how long the pandemic will persist.
Both mall owners and their tenants want to get back to business, but the pandemic continues to complicate that.
With the outbreak showing signs of easing in some areas, and political pressure to salvage the economy, many malls and nonessential stores are opening back up. The disease remains a threat, however, so that requires new protocols.
Simon, for example, has reportedly forged a plan to slowly open its malls with limited hours, occupancy limits, spacing configurations to promote social distancing, employee screening for symptoms, employee training and face mask requirements for workers, among other steps.
Macy's, which anchors many U.S. malls nationwide, also announced plans for a phased opening with similar limits. As did Nordstrom more recently, in the process forgoing many of the high-touch services that are normally its best differentiators. "It has been a continuous conversation as the pandemic has evolved," Sternberg said of his own properties. "We are going to take every precautionary measure to ensure the health and safety of our tenants, employees and customers."
But much of this may be wishful thinking. Not only are stay-at-home orders still in place in many areas, but most shoppers (89%) also remain anxious about shopping in physical spaces, according to research from e-commerce payment solutions company Fast. The top worry for 63% of survey respondents is being too close to other people, 40% are most concerned about store cleanliness, with 34% leery of touching point-of-sale terminals and 32% of handling cash.
More than 60% of Americans are worried about lifting restrictions too quickly, with only 29% concerned about not reopening quickly enough, according to a May 5 Monmouth University poll. A third want to move to ensure the economy "does not go into a deep and lengthy downturn," but 56% say public health concerns are more important in deciding when to end the current limits, according to that report.
Indeed, many politicians and much of the public — consumers and retailers alike — aren't sufficiently appreciating that scientific knowledge about the virus remains scant, and that the public health problem is ongoing, according to Nick Egelanian, president of retail property development firm SiteWorks.
"The medical drives everything — there will be no return to normalcy, whatever normalcy means, until there's a solution to the virus," he told Retail Dive in an interview.
"Our entire society is built for density. Even people in rural areas tend to go to cities for services," he said. "And malls by their nature are more dense than grocery stores or big-box stores. Are you going to open up the main portion of a mall?"
Economic fragility is also a factor, however. A recession, if it isn't here already, threatens to undermine consumer discretionary spending even as, and well after, shopping resumes.
Too many stores, selling too much apparel
Even if the main portion of a mall does open, there are going to be many stores — both anchor department stores and specialty retailers — that won't, ever.
Macy's, which had already slated 125 locations for closures over the next three years, last week hinted that there could be more in light of COVID-19 even as it announced the reopening of several stores. Nordstrom was more assertive this week in announcing the permanent closure of 16 stores nationwide. Lord & Taylor is reportedly preparing to liquidate all stores, and, with J.C. Penney and Neiman Marcus, is likely to go bankrupt. Hundreds of Sears stores are already gone.
"[T]he malls are really in bad shape no matter what. The class A mall will suffer just as bad ... this is a systemic issue.""
Founder and CEO, ShopFulfill
In fact, a little more than half of all mall-based department stores could close for good by the end of next year, setting off a spiral "knockdown" effect, as in-line mall tenants would be allowed to lower rents or exit leases. That was already a reality, but the pandemic has sped up a scenario that was set to unfold over the next five to 10 years to instead happen over the next couple of years, according to Green Street's Tibone.
Several analysts note the growth of e-commerce, also spurred on by the outbreak, in accelerating the downfall of brick-and-mortar retail. That and other factors make few malls immune to decline, according to Shlomo Chopp, founder and CEO of ShopFulfill, which leverages malls for e-commerce fulfillment.
"I think the malls are really in bad shape no matter what," he told Retail Dive in an email. "The class A mall will suffer just as bad — as I have been saying for [a long] time, this is a systemic issue."
Other analysts pinpoint apparel retail as a major factor, especially for department and specialty stores, less so for off-price stores. Clothing sales growth has ebbed for years, and there were already too many stores selling it. In March, a month only partially affected by pandemic-induced closures, apparel sales plunged more than 50%.
Specialty retailers are reeling. In a sign of things to come for others, J. Crew filed for bankruptcy this week. COVID-19 could provoke not only that retailer, but also the likes of Gap, Abercrombie & Fitch, American Eagle and Victoria's Secret, among others, to close hundreds of stores, according to Lee Peterson, executive vice president of thought leadership and marketing at WD Partners.
"Five hundred stores for anybody right now is too many for anyone except Walmart or dollar stores," he told Retail Dive by phone, noting that for most, 100 is more like it. "It's a lot of pain and a lot of lost jobs, but the changes that were needed to get specialty on a new track just happened," he also said.
Back to the future
As stores close up indefinitely, all shopping center types face risk, but traditional enclosed malls face the most.
Despite their healthy sales these days, grocery anchors won't give much of a longer term boost to their fellow tenants in strip centers, which could lose 15%, while those with big-box stores face a 10% cash flow decline, Tibone said during a recent Green Street webinar. Traditional malls face a 20% decline in cash flow compared to 2019, which will accelerate the demise of many. Furthermore, investing in a more diverse mix of tenants, including medical, office, hospitality and residential tenants, doesn't make sense like it did pre-COVID, he said.
In all, Cowen & Co. analysts expect stores to close down in 10% or more of shopping centers, depleting the number of U.S. malls to 800 or fewer, from about 1,200 now. Although they face especially precarious futures during the crisis, this is one area where non-mall retailers may have an advantage, Egelanian said, noting that they are "independently accessed and not connected to a central walkway or ventilation system."
Pension Real Estate Association Research Director Greg MacKinnon, speaking during a virtual discussion hosted by the University of North Carolina Kenan-Flagler Business School, said he sees even more potential there.
"Shopping malls came along in the fifties and sixties and pretty much killed those downtown Main Streets. We will have to go back to that," he said. "The future of retail is in the past. The old, traditional style of shopping mall, where you had two anchor department stores at either end and a bunch of in-line clothing stores in between — anyone who sticks with that model is going to be dead."