The COVID-19 pandemic has been an extreme event. The disease outbreak has devastated human health and upended the global economy, and remains a threat after a year despite the rapid development of vaccines. When it comes to business in general and retail in particular, it has altered or sped up several trends, including the decline of malls, once the favorite shopping destination of much of America.
That slide was already underway before last year. But several analysts, including Green Street, have noted that the closures that might have taken place in the next five years to a decade are now more likely to happen in two, with the countdown already ticking.
With foot traffic to malls disappearing even before the pandemic, several retailers, including all-important department store anchors, have fled, either by shrinking their footprints or shifting to other locations. In the first quarter of this year, the vacancy rate at enclosed malls reached an all-time high of 11.4%, a 90-basis-point jump from the previous quarter, according to Moody's Analytics REIS. Given the structural decline, that's not likely the bottom, according to Moody's Analytics Senior Economist Thomas LaSalvia.
But the pandemic could be providing a softer landing for these shopping centers, in the form of a flight to suburbia from cities. At least, mall executives hope so. Earlier this year, Simon Property Group CEO David Simon predicted that "the suburbs are going to be hot" and "where the action is in the future" and told analysts that will "spell a good opportunity for us."
Living for the suburbs?
The trouble with this theory is that it's a little shaky.
It does appear that last year, with the usual urban amenities like theater, dining and shopping reined in by the pandemic's restrictions, some people, especially those in wealthier households, headed to second homes or their parents' houses in the suburbs, according to a report from PwC and the Urban Land Institute. Many of them will or already have returned to their city apartments. But some of this swing toward suburbia could last three to five years, according to that report.
"But, like many of the changes that have occurred due to the pandemic, the ultimate impact on the desirability of large cities will be on the margin," according to the report. "Some companies and residents will choose smaller cities or the suburbs, but, in response, cities will likely creatively adapt, perhaps adding more green space and outdoor activities, and continue to improve livability to retaining and attracting residents who continue to value an urban lifestyle."
Any suburban boom will be partly fueled by people who continue working from home even after the pandemic, some experts say. Green Street analysts, for example, earlier this year said they expect higher income consumers to move to "the suburbs and low-cost markets, potentially upending the long-running megatrend toward urbanization," though they also noted that some of their analysis involves "guesswork." Like Simon Property Group's Simon, researchers at footfall analytics firm Placer.ai see these trends as "a powerful opportunity for suburban retail and malls as they look to address the needs of this new population – one which likely has more spending capacity than they did before."
"Millennials hate the mall more than anybody."
Many demographics researchers see the move toward suburbia as mostly unrelated to the pandemic, if perhaps sped up by it, with an increasing number of millennials starting families and taking a predictable step away from urban life in favor of backyards and good schools.
That's not emptying cities utterly. It looks like older members of Generation Z are stepping up to take their city apartments thanks to falling rents, according to research cited by Placer.ai, which called the movement away from cities "less about an exodus than a revival."
There's also evidence that to some extent millennials are importing the vibe of urban life to the suburbs. Malls aren't necessarily a big part of that.
"Millennials hate the mall more than anybody," Nick Egelanian, president of retail real estate firm SiteWorks, said by phone. "They're going to shop at Costco, they're going to shop at Trader Joe's, they're going to shop at Whole Foods, they're going to shop at all the TJX concepts. And if they have a professional job, they'll go to Nordstrom to get nicer clothes and maybe some will go to Saks once in a while."
Most of those retailers, including the big-box stores that have been siphoning market share from department stores for decades, are also found in the suburbs. They present formidable competition that was growing fiercer well before the pandemic, Egelanian also said.
"Almost all of the malls that are left are in the suburbs. They were in the suburbs before the pandemic, they're in the suburbs now," he said. "So, if we think some moment in time, shifting where people are staying, is going to change 40 years of secular trends change, think again. A momentary change in human behavior does not change a 40-year trend in how retail works, and what people's preferences are. And to the extent that any other retailer, like the T.J. Maxxes of the world, think that there's going to be a population boom in the suburbs, they're going to build all the more."
As Moody's economist LaSalvia also said in his report, that doesn't mean that every enclosed mall is doomed. Unlike Egelanian and others, Jan Rogers Kniffen, CEO of J.Rogers Kniffen WorldWide, does see a dramatic, possibly decades-long shift away from cities.
But fewer than 300 malls may benefit by what he calls "the great de-densification that actually began before the pandemic and was dramatically accelerated by COVID."
"There are 278 great malls in America. They are virtually all suburban. They did not and do not need saving," he said by email. "They were always going to be fine. They will have high occupancy, rising rents, and increasing foot traffic as soon as the pandemic fades. They will also get the best stores from the best retailers. Will the great de-densification of America save the remaining 650, or so, enclosed malls? No, it will not."
Regardless of how many U.S. consumers change their address or stay put, or for how long, most malls need to get moving, experts including Egelanian, Kniffen and others say. Some need a complete transformation, from retail-heavy behemoths flanked by department store anchors into mixed use campuses, residential developments or distribution centers. Others have to shrink dramatically, and sell much less apparel and footwear, according to Kniffen.
"Some, unfortunately, will get bulldozed," he also said. "Some will become hydroponic farms. Some will be supported by economic redevelopment by the nearby community that does not want to see the mall go away. What will really benefit from the great de-densification? Casey's General Store and Tractor Supply and Boot Barn and convenience strip centers."