Dive Brief:

• Major shifts in retail and a series of high-profile retail bankruptcies are contributing to a generally downbeat buzz about shopping malls, but that belies the reality that many shopping centers are thriving, as Bloomberg reports from the annual convention of the International Council of Shopping Centers.

• The gloomy narrative also fails to take into account the opportunities in retail spaces abandoned by retailers like Macy's, J.C. Penney, The Limited, Wet Seal, Payless, Rue21, Bebe and others that this year alone have shuttered all, most or many of their stores. In many cases, these spaces are being converted to non-retail uses like food concessions, event attendees told Bloomberg. More generally, research has found that consumer spending has picked up but that Americans are shifting to things other than apparel. 

• Mall vacancy rates in most areas of the U.S. remained relatively flat in the first quarter, according to data from real estate research firm Reis. The average national asking rent rose 0.3% in the first quarter of 2017, while effective rents grew 0.4%, according to Reis. Still, Bloomberg notes, 37,000 industry players are gathering in Las Vegas for ICSC’s annual meeting to discuss how to handle an era of retail that is being re-shaped, if not worse, by e-commerce and changing consumer priorities.

   

Dive Insight:

Retail real estate executives find themselves fighting a narrative of doom that doesn’t quite fit the reality they face. In fact, results from the first quarter do suggest stability in many quarters.

Simon Property Group on Thursday said occupancy in its U.S. malls and premium outlet properties was 95.6% at the end of its first quarter, unchanged from the same point last year, according to the company's first quarter earnings press release. Simon CEO David Simon has said that e-commerce is not going to smash brick-and-mortar retail, and that, with some thought, effort and diversification, retail properties can thrive.

Last month he also told analysts that retailers and mall owners must work together to improve and remix the shopping experience. “I'm hopeful that [retailers are] going to reinvest in their stores, improve their inventory mix and service their customer better,” he said. “And, by the way, we've got to have the same pressure on us to do that. So, it's a two-way street. We are up for the challenge. We have the conviction in our business to do that; as you know, if you go through our properties, by and large, they look, they feel great. We're going to redevelop a lot of opportunities.”

ICSC attendees also say they're aware of the difficulties, including the fact that many poorly performing malls are swiftly losing retailers and customers. Retail property loan delinquencies rose by 0.6 of a percentage point to 5.76%, according to data from real estate research firm Trepp LLC. “Special servers” that handle troubled commercial mortgage securities took on $3.1 billion worth of retail property-backed loans last year, up from $2.9 billion in 2015, Trepp added.

As ICSC attendees who spoke to Bloomberg noted, investors are wary — with good reason. Mall property values are shrinking in many areas of the U.S., and landlords are increasingly throwing in the towel when they get underwater. From January to November 2016, 314 loans secured by retail property — totaling about $3.5 billion — were liquidated for a loss of $1.68 billion, a rise of 11% from the same period in 2015, according to data from Morningstar Credit Ratings. 

Long-term trends might belie the opportunistic mood of mall owners at the conference. Retail analyst Nick Egelanian, president of retail development consultants SiteWorks International, who is attending the conference, told Retail Dive that the group isn't addressing the obsolescence of the full-line department store model. 

Sales in U.S. department stores, estimated to have once peaked at over $400 billion annually, today total less than $70 billion annually for the entire industry, he said in email to Retail Dive. "While we expect higher end 'specialty apparel' stores like Nordstrom and Nieman Marcus to remain relevant, sales at Sears, J.C. Penny, Macy’s and the few remaining regional department store operators are in a death spiral."

Those stores once housed 50 or more merchandise departments, but today they rely almost entirely on apparel, cosmetic and housewares sales. "Each of these remaining categories is under under outright assault as a variety of discounters, including T.J. Maxx, Ross, Marshalls, Home Goods, H&M, Zara and Ulta Beauty collectively open well over 500 stores annually,"  Egelanian said. "This represents a massive long-term and continuing market share shift that is not a short-term trend but rather a 30-year trend in its final act."

Like Simon, Egelanian​ doesn't believe that e-commerce is the force underpinning that shift, and he agrees that new strategies will lift the sector.

"Contrary to popular belief, internet sales are contributing little to department store declines, and internet sales strategies will do little to end the bleeding or stop the closure of thousands of additional department stores and hundreds of B and C malls, which are being rendered functionally obsolete," he said. "In a strange twist, however, the smaller number of malls that remain operating when the dust settles will become virtually indestructible by offering only best-in-class higher end merchandise in exclusive collections.  We already know who these the winners will be, and the vast majority are owned and operated by four REITs: Simon, Westfield, Macerich and GGP."