Retail N Illinois

The decline of the American mall? Not necessarily

The decline of the American mall? Not necessarily,ph01

The headlines about the retail industry have been dire, usually some variation on “The death of the American Mall.” That’s what happens when well-known brands announce bankruptcy filings and massive store closures.

While many traditional mall retailers have announced closings (including Toys R Us, Gymboree, Payless ShoeSource, The Limited and Sports Authority), retail sales continue to grow between 4 and 4.5 percent per year. In addition, online sales are changing consumer behavior and the way people shop.

All these factors have affected regional malls, requiring them to adjust and adapt to succeed. Today’s successful mall is a well-located center with the right mix of retail and entertainment that caters to the new and evolving shopping attitudes of today’s retail consumer.

E-commerce and the Amazon effect

Much is made about the growth of Amazon and its effect on the traditional bricks-and-mortar store. But online sales constitute just under 9 percent of retail sales, according to the Commerce Department. To say that Amazon alone is destroying the physical retailer is neither an accurate nor a complete picture of what’s happening in the retail landscape.

Many retailers over-expanded and did not adapt to the changing behaviors of today’s retail customers. If the so-called Amazon effect were killing all retailers, how is Best Buy still in business? It’s true that Amazon did help accelerate the demise of poorly run electronics retailers (Circuit City, H.H. Gregg, RadioShack), but Best Buy adapted its business plan to focus on service, matching online prices and employee training.

The company created “Experience Shops” within select Best Buy locations where customers can enjoy immersive product experiences with such brands as Samsung, Sony and Microsoft. And instead of competing with Amazon, Best Buy partnered with the online retailer to sell its Echo and Fire TV Stick devices. Best Buy also shrunk both the number of stores and average store size.

As a result, Best Buy ended its sales decline and has experienced modest growth since 2015. The company’s efforts have been reflected in its stock price, which has recovered from a low of $14.21 in January 2013 to around $55 in mid-November 2017.

Mixing it up

It’s becoming evident that the mall of the future may be a mixed-use development incorporating retail, dining, entertainment, multifamily housing and office space. Many of these trends are driven by changing demographics. Millennials are more likely to shop online, and operators recognize that consumers need to be enticed to leave their homes and go shopping. The savvy operators are attracting customers with experiences that you can’t get online.

Chicago-based developer Bucksbaum Retail Properties focuses mostly on ground-up urban developments that eschew department stores while incorporating residential, office, entertainment and hospitality uses. Bucksbaum’s NewCity development in Chicago, for example, includes a 199-unit luxury apartment building, restaurants, an upscale supermarket, a high-end bowling alley and medical office space amid its retail options. And like other Bucksbaum properties, NewCity bears closer resemblance to a village square than a traditional mall.

“Customers are looking for something that goes beyond the normal,” says company CEO John Bucksbaum. “There are a lot of things you can deem to be entertainment, but it’s becoming more challenging to make traditional apparel shopping entertaining. But this is not to say that innovative apparel retailers can’t make the experience entertaining and interesting.”

That’s what led mall giant Westfield to acquire Scott Sanders Productions in September of 2016. As Westfield’s creative head of global entertainment, Sanders—a Tony Award-winning producer of The Color Purple on Broadway—will oversee entertainment and experiential events for Westfield’s 35 properties around the world. An exhibit that immerses attendees in near life-size reproductions of Michelangelo’s Sistine Chapel ceiling frescoes is touring eight Westfield properties through next fall.

“Westfield recognizes that to attract large crowds, they’ve got to make it something that goes far beyond anything that has been done previously,” Bucksbaum says. “They understand you cannot simply rely on doing the same things, whether it’s the same retailers or the same type of marketing events.”

Dinner, then a store

Dining is also becoming a big draw. According to CBRE, restaurants occupy just 4.6 percent of the space at U.S. malls (and much of this space is devoted to the aging food court concept). The ratio is significantly higher in other parts of the world. Dining options account for more than 30 percent of mall space in Singapore, while in Hong Kong malls it’s about 23 percent, according to real estate services firm JLL.

We can expect American malls to follow this trend, as mall owners try to add unique dining experiences to draw traffic. But noting that restaurants have a high failure rate, Bucksbaum says mall owners need to be smart about making sure they include the right dining options.

“Just because you put a restaurant in doesn’t guarantee success,” Bucksbaum says. “The greater likelihood is you’ll find yourself with a dark space that needs to be replaced. Restauranteurs often tell me it’s usually the second-generation restaurant space that’s most successful.”

Resizing and reinvestment

The fact is the United States has too much retail space—24.5 square feet of retail per capita, compared to 4.5 square feet per capita in Europe. While Class-B and -C malls are most likely to vanish completely, there’s still room for the prime Class-A locations to thrive. They’re still desired shopping locations, providing convenience for consumers.

Retailers are also learning that physical and online stores are complimentary. Nordstrom recognized that online sales are strongest in markets where they have a physical store. But stores like Nordstrom realize they don’t need to saturate a market the way you used to.

The key for owners and developers is to focus on improving the mix of space with the right entertainment options and—yes—the right retailers.

“If you have not been reinvesting in your property annually, I doubt your property is very viable today,” Bucksbaum says. “It might still be open, but it probably shouldn’t be and, ultimately, it won’t be. People still like to go out. If you give them something that’s truly unique and special, they will come out for it.”

Kim Liautaud is managing director at Chicago-based BMO Harris Bank. Martin Kearney and Joseph Schweitzer, Directors of U.S. Commercial Real Estate at BMO Harris Bank, contributed to this article.