There may be some retailers who'd just like to break up with malls, considering the troubling slowdown in footfall. But the mall may be wooing them back with a proposal to serve them, not just as landlord, but also as owner.
While that might seem like a drastic move, it's one that Simon and GGP (now owned by Brookfield) along with licensing firm Authentic Brands Group, made back in 2016, when they muscled past private equity firm Sycamore Partners with a $243 million bid to take over teen apparel retailer Aeropostale at its bankruptcy auction. Just a couple weeks later, various rent-reduction deals helped to keep 400 of the brand's North American stores open — about 75% more than previously estimated.
A leadership "faction" at fast-fashion retailer Forever21 may have been eyeing that success when they reportedly approached their landlords with open hands, according to a June report from Bloomberg.
An Aeropostale-style save isn't the usual outcome when private equity takes over. In fact, Simon Property Group CEO David Simon, boasting to analysts last week about the teen retailer's current health on an earnings call, said, "So I think we're not too bad at this investment. We're certainly as good as the private equity guys when it comes to retail investment."
Simon wouldn't rule out making that kind of move again, either, also saying, per a Seeking Alpha transcript, that he likes partnering with Authentic Brands and that the company makes investments "obviously for our shareholders but also for the benefit of these communities."
"I think it's very possible we're going to be very smart about it," he said, noting later that the company would look into supporting companies "that we think have brand [value] and that have the volume."
But how smart is it, really?
Simon Property Group has many of the best performing malls in the country, but its past strategy may be under pressure in the current environment.
"Simon was once so strategic and clever in paring back its portfolio through Washington Prime and buying up undervalued outlet centers. Those days appear to be over now, however," retail analyst Nick Egelanian, president of retail development firm Siteworks, told Retail Dive in an email. "Simon and other mall owners (yes even A mall owners) face an existential crisis as the fate of their secondary assets is now all but sealed and the coming collapse of J.C. Penney and Sears — and eventually Macy's becomes more and more unavoidable. Even many A malls will need to downsize and repurpose underused real estate."
Retailers are peeling themselves off the mall in various ways. Some, like J.C. Penney and Macy's, shrink their footprints, others like GNC shift their focus to strip centers, while yet others like Sears pretty much give up. The second quarter mall vacancy was flat, while the neighborhood and community shopping center vacancy rate fell to 10.1%, according to the latest report from real estate research firm Reis. That's in part because not many new malls are being built. And many of the businesses replacing shuttered stores aren't retailers.
"It was a troubled company for a reason, and that reason (or reasons) isn't likely to just disappear just because there's now a new owner."
Marketing Director, RetailNext
"What do you do with a suburban mall that's half empty? Mall owners are trying to figure out what to do with these spaces because of their inability to get new tenants to replace the stores that are leaving," Scott Stuart, CEO of Turnaround Management Association, told Retail Dive in an interview. "You've seen how many malls in the country have tried to repurpose, some more successfully than others. These leases are very expensive, and mall owners don't want empty spaces."
That pins malls between a rock and a hard place, according to Allen Adamson, co-founder of brand consulting firm Metaforce and marketing professor at New York University Stern School of Business. "It's a Catch 22 — as retail falls apart, that's the core of Simon's mall business, without retailers they own too much real estate," he said in an interview. "They can put in pop up stores or entertainment but there's only so many fitness centers. So it makes sense for them to try to help retailers survive because Simon would benefit."
Many retailers could use an injection of money to help them finance a turnaround, and Real Estate Investment Trusts (REITs) like Simon tend to have deep pockets, he said. "The biggest hurdle for retailers is empty gas tanks," he said his research shows. "They've waited too long and so they're under pressure."
Simon last week said the group has $6.8 billion of liquidity. But that doesn't mean it has the expertise necessary to revamp troubled retailers in a swiftly changing environment, according to industry experts.
"[M]ost mall REITS have survived by being experts in real estate, and even experts in retail have had trouble turning retailers around," Adamson said. "The likelihood that it would be successful or more successful than retailers in turning around retail is slim."
The wrong expertise?
Indeed, while David Simon singled out private equity, that's not the best comparison, experts say.
"Perhaps the biggest obstacle to overcome with a mall operator acquiring a troubled retailing brand is developing — or acquiring — the skill set necessary to successfully operate a retail brand," Ray Hartjen marketing director at RetailNext, told Retail Dive in an email. "Operating a retail brand, from supply chain to clustering stores, from marketing to store operations, from merchandising to shopper service, is completely different than operating a successful mall company. It's possible to acquire those skills by acquiring the company. The challenge, of course, is merging the two organizational cultures."
"Saving dying retailers, entering the internet space, replacing dying anchors with 'Commodity Retailers' and browbeating others to stay are not strategies. They are desperate acts of tactical delay."
A flush REIT owner, as Adamson suggests, could help clean up debt and provide rent relief, but Hartjen warned that could cause trouble among the other tenants. Plus, some retailers are struggling for reasons that go well beyond basic retail skills, and that could limit a REIT's abilities even further, he said.
"It was a troubled company for a reason, and that reason (or reasons) isn't likely to just disappear just because there's now a new owner," Hartjen said. "If the root causes of the retailer go deeper, it might require considerable additional investment to acquire and develop a strong executive and managerial team."
Investing in struggling retail tenants will take at least as much thought as money, multiple experts said.
"They've made a lot of money on these leases, and if they lost a tenant another would come in," Stuart said. "That's not so true anymore. They might need to look at that model or get more conciliatory and creative to accommodate struggling retailers. I don't think there's any clarity on that yet. If they want to keep tenants — they need to create the incentives to keep them rather then a 'take or leave it.'"
In some cases, though, struggling tenants may be best left alone, according to Egelanian.
"The right thing to do is to identify the survivors and strengthen them while setting the losers aside," he said. "Saving dying retailers, entering the internet space, replacing dying anchors with 'Commodity Retailers' and browbeating others to stay are not strategies. They are desperate acts of tactical delay."